Competitive tendering and cross-shareholding in public passenger transport

•Firms can respond to competitive tendering by increasing ownership links.•Cross-ownership reduce competition and could raise the equilibrium bid.•This could partly invalidate the rationale for introducing competitive tendering.•The theoretical framework is first-price single-bid auctions.•Evidence relates to the Norwegian local bus industry.

Competitive tendering is a widespread procurement strategy for increasing efficiency in the passenger transport industry. Motivated by the structural changes following the increased use of competitive tendering observed in the Norwegian local bus industry, this paper uses first-price single-bid auction theory to demonstrate that rational firms can respond strategically with cross-ownership when exposed to the uncertainty entailed to competitive tendering. This could raise the equilibrium bid implying that the subsidy reduction rationale for introducing competitive tendering is partly invalidated. Transport authorities should be aware of such possible structural changes when considering further implementation of competitive tendering.