The Effects of Increased Competition in a Vertically Separated Railway Market
AbstractThis paper presents a game-theoretic model of a liberalized railway market, in which train operation and ownership of infrastructure are vertically separated. We analyze how the regulatory agency will optimally set the charges that operators have to pay to the infrastructure manager for access to the tracks and how these charges change with increased competition in the railway market. Our analysis shows that an increased number of competitors in the freight and/or passenger segment reduces prices per kilometer and increases total output in train kilometers. The regulatory agency reacts to more competition with a reduction in access charges in the corresponding segment. Consumers benefit through lower prices, while the effect on the operators' profits is ambiguous and depends on the degree of competition. We further show that social welfare always increases through more competition in the freight and/or passenger segment. Finally, social welfare is higher under two-part tariffs than under one-part tariffs if raising public funds is costly to society.
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Bibliographic InfoPaper provided by Swiss Economics in its series Working Papers with number 0025.
Date of creation: Oct 2010
Date of revision:
Access charge; optimal pricing; railways; regulation; vertical integration;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-COM-2010-11-13 (Industrial Competition)
- NEP-MIC-2010-11-13 (Microeconomics)
- NEP-REG-2010-11-13 (Regulation)
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