July 11, 2004

Could (and should) "rights" be auctioned off?

Patrick Crozier | Fares and Ticketing

As regular readers will be aware I am a free marketeer. I believe that in the long run free (or freer markets) shift the goods. The operative phrase being "long run". In the short term, as we saw with the break up of the Soviet Union, things can be pretty hairy. Indeed, I think the fear of what might happen in the short run is one of the greatest obstacles to getting the state out of things like health and education.

Could things be done differently? Is it possible to construct a system which in the medium-term will deliver the free market but which will keep the short-term pain to a minimum?

Consider an example that has been exercising my imagination recently: train overcrowding. The answer, of course, is to abolish fare control and although in the long run things would get better in the short run things (for many people) would get decidedly worse as train fares went up sharply.

Could one answer be to auction off (or perhaps more likely, give away) the right to control fares? Maybe that sounds a bit complicated. Here's how it might work in practice:

The state identifies all those people currently benefiting from a controlled fare. It gives each of them a shareholding in a company proportional to how much they spend on fares. The company has the right to regulate fares.

My guess is that the rail companies (I am assuming here that they are privatised) would pretty quickly buy up the fare control company. In which case every existing shareholder ie current beneficiary of fare control would get some sort of payment from the sale of their shares. This payment would have to, in some way, reflect the value of fare control to passengers or otherwise they wouldn't sell. So, in other words: fares are freed and yet the short-term pain is minimised.

But would it work? And if it could work here could it work elsewhere?

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Comments

I like the idea.

One problem occurs to me: How do you identify all those people currently benefiting from the controlled fare, and how many shares each person should receive?

A possible answer is to announce the new policy, say, a year in advance. Everyone who travels by train should hold on to their tickets. When the company is set up, everyone submits the tickets they bought between 1st January and 31st December 2005. Every pound you spent on rail travel entitles you to one share of the fare control company.

Posted by Andy Wood on July 11, 2004

Another thought occurs to me.

The only reason that the shares in the fare control company will have any value is because they might be bought up by a rail company that wants to raise fares, or that a rail company might pay the company to raise the maximum fare.

This begs the question: How should the fare control company decide the fares?

If it's by a majority vote amongst shareholders, it raises the possibility that the rail company buys up 51% of the shares (or whatever the necessary majority is) and abolishes the limit on fares, leaving the 49% who didn't manage to sell their shares uncompensated. Furthermore, since shares in the company will be worthless when a rail company owns 51% of them, once it becomes apparent that it will own 51%, the share price will crash to almost zero as shareholders rush to offload their shares before the rail company achieves its target. This would leave some of those who managed to sell their shares undercompensated.

Furthermore, the rail company could be quite open about its strategy - it's even in its interest to be. It simply announces "We now own 5% of the shares in the fare control company. We are buying more shares whenever the price falls below £1/share. We anticipate owning 51% in 6 months time."

A shareholder would then realise that his shares are likely to be worthless in 6 months. I predict that the crash would happen almost immediately, and the rail company would buy the remaining 46% of the shares it requires for next to nothing within a week.

Alternatively, if the fares are decided by unanimous vote amongst shareholders, everyone would be compensated, but you would then have a hold-out problem (and I bet you Bob Crow would be one of the hold-outs).

Posted by Andy Wood on July 11, 2004

Hmmm. This is one of those things that should work in theory, but in practice human fallibility would mean it would go off half cocked - a bit like rail privatisation.....

Posted by andy wakeford on July 12, 2004

Andy Wood - fortunately, company law has been designed to prevent the situation you describe: if someone wishes to acquire a majority holding in a company, they need to make a takeover bid for all the shares (precisely to stop minority shareholders being stiffed by unscrupulous big businesses).

Your ticket exchange idea is an excellent one, incidentally (although it could run into problems under the current rules, since you're technically supposed - in an only-enforced-by-automatic-machines kind of way - to surrender your ticket at the end of your journey).

Andy Wakeford - you might be right, although since this issue wouldn't directly affect technical operations it might be more successful (marketing and yield management are ways in which the new railway is clearly better than BR...)

Posted by john b on July 12, 2004
...if someone wishes to acquire a majority holding in a company, they need to make a takeover bid for all the shares...

That solves that problem then, but how does it prevent a takeover being thwarted by a single holdout? Or does that happen all the time and it's only the minority of successful or nearly successful bids that make it to the news.

you're technically supposed ... to surrender your ticket at the end of your journey.

Alternatively, a coupon is issued with each ticket. You surrender your ticket at the end of your journey and submit your coupons in exchange for shares.

Posted by Andy Wood on July 12, 2004

Simplifiedly, it's done on a majority vote of the shareholders other than the bidder (or his mates, who are called 'concert parties').

This is a very boring document explaining exactly how things work out. Another important point I'd forgotten is on page 93, which says that a bidder must offer shareholders (as a minimum) the highest price that the bidder has paid for shares in the company in the last year.

Posted by john b on July 12, 2004

By "long term", you mean by the time some generations have died out and people have forgotten how it was when most of them could afford to take the train?

Posted by Matthew on July 22, 2004

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