Britain's £3.6 billion-a-year local buses industry is to be referred to the competition watchdog after it was claimed that restricted competition on many routes has almost certainly made fares too high.

The Competition Commission investigation is likely to take many months and will focus on the big four national bus companies, all of which are listed on the stock market, FirstGroup, Stagecoach, Arriva and Go-Ahead. It will also look at companies like National Express and TransDev, which are strong in one or two geographic areas.

London buses will not be included in the probe because they were not deregulated in the same way as the rest of the country with London Transport still having overall control of fares.

John Fingleton, chief executive of the Office of Fair Trading which is calling for the competition inquiry, said: "Our investigation has unearthed a range of evidence that suggests the market for local bus services is not working as well as it should and may be resulting in higher prices for bus users.

"This is a market where an estimated £1.2 billion comes from public subsidy so distorted competition can potentially have a significant impact on taxpayers."