Cardiff's main bus company has been accused of "predatory behaviour" in an investigation by the Office of Fair Trading (OFT).
The firm is accused of using its dominant position to see off a rival
Cardiff Bus offered a service which operated below cost and was withdrawn after a rival firm left the market, the OFT has provisionally found.
It said the firm operated the service at a loss forcing 2Travel plc out of the local market.
Cardiff Bus denied it had infringed competition law.
A spokesman said: "Cardiff Bus confirms that it has today received a statement of objection from the Office of Fair Trading.
"Cardiff Bus will be vigorously defending this allegation as it does not believe that it has infringed competition law."
Their response followed a statement issued by the OFT which said it had provisionally found the company "engaged in predatory behaviour designed to eliminate a competitor".
It said that between April 2004 and February 2005, the firm deliberately made a loss after another bus company 2Travel plc began to operate services.
"Cardiff Bus is accused of providing a new no frills bus service which operated below cost and was withdrawn once 2Travel left the market," said the OFT.
"The OFT found that the Cardiff Bus Company, which carries an estimated 80,000 people each weekday in Cardiff, used its dominant position to run its no frills services with revenues so far below costs that it was impossible for its competitor to remain in the market."
Under the Competition Act 1998, predatory behaviour is defined as a dominant company sustaining losses in the short run with the knowledge it will be able to recoup them once the competition is forced to exit.
Cardiff Bus can now make written and oral representations to the OFT which will be taken into account before a final decision over whether the law has been infringed is made.
Robin Finer, OFT assistant director, said: "Dominant companies have every right to compete vigorously but they have a special responsibility not to distort competition.
"Though consumers might see a short term fall in prices, ultimately they will lose out if a dominant company can exercise its market power without constraint or regard to normal competitive pressures."