I agree with the theory behind that but......
I don't know Potteries in great detail but I know that First Bus had managed to consistently p*ss off their travelling public, through poor services, vehicles, staff, and fares, until the current management took over. They gave out an excellent impression of an operator who really couldn't care less, and the vehicles and staff reflected it 100%. Even though the new management has now reduced the fleet by nearly 50% I'm not sure there won't be more cuts to come.
Of course, the downturn isn't just down to First Bus poor performance, the whole area has been in decline for years and most of the 5 towns are rather quiet, dismal, places much of the time. To confirm the general decline, it needs to be recognised that Potteries has largely lost those numerous small independents that used to be around in quite sizeable numbers - if they can't make a business out of it then it's not surprising that First PLC can't either.
D&G is the only independent of any size and, coming under the Peddle wing, has carefully replaced some First services if they felt they could make them sufficiently profitable. Even then they haven't always achieved adequate returns, and services have been cut or withdrawn subsequently.
The likes of Hanley, Newcastle etc (about the only 2 places where people now go to in any numbers) do not suffer too much in the way of road congestion and delays, so that can't really be given as an excuse [whereas it can for, say, Worcester].
I think that there are simply too few potential bus passengers for anybody to make much profit. Having said that, if First Bus were to ever pull out completely then I'm sure that a D&G near-monopoly might be good for all concerned.