The Office of Fair Trading has rejected a complaint that bus company First Edinburgh had abused its dominant position in the market.
The OFT had received the complaint from rivals Lothian Buses.
It was based on a claim that First Edinburgh had reduced prices and increased services in a bid to push the competing firm off the road.
OFT said the former had not been abusive and had pursued reasonable commercial lines to benefit passengers.
The investigation found that Lothian, rather than First Edinburgh, was the largest bus operator in the Greater Edinburgh area.
However, First Edinburgh was likely to be dominant in the area surrounding the capital.
There was no evidence that First Edinburgh's prices were low enough in comparison with its costs to raise questions about predatory pricing, the OFT said.
It added: "However, there was evidence that First Edinburgh did not intend to drive Lothian from the market, and that it did not believe that it was capable of doing so.
"More compelling evidence was found that First Edinburgh was pricing low in an attempt to establish a more secure commercial basis for its Edinburgh
The OFT said it therefore concluded that First Edinburgh's conduct
represented legitimate competition.
FirstGroup said it was delighted with the OFT's decision.
"We always maintained that the allegations made against us were unfounded.
"We welcome the OFT's conclusion that passengers in Greater Edinburgh benefited
from our low fares and more frequent bus services," it said.