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Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network

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  • Gianni De Fraja

    ()

  • Emanuela Michetti
  • Piercarlo Zanchettin

    ()

Abstract

The paper studies the regulatory design in an industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC’s incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may in fact be preferable from a welfare viewpoint.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 09/7.

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Date of creation: Feb 2009
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Handle: RePEc:lec:leecon:09/7

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Keywords: Network regulation; Railways; Incomplete contracts; Relation specific investment;

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  1. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  2. Newbery, D., 1996. "Privatisation and Liberalisation of Network Utilities," Cambridge Working Papers in Economics 9620, Faculty of Economics, University of Cambridge.
  3. Luisa Affuso & David Newbery, 2002. "The Impact of Structural and Contractual Arrangements on a Vertically Separated Railway," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 83-92.
  4. Yvrande-Billon, Anne & Menard, Claude, 2005. "Institutional constraints and organizational changes: the case of the British rail reform," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 675-699, April.
  5. Gianni De Fraja & Alberto Iozzi, 2008. "The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 1011-1040, December.
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