Economies of Scope in European Railways: An Efficiency Analysis

In the course of railway reforms at the end of the last century, European na- tional governments, as well the EU Commission, decided to open markets and to separate railway networks from train operations. Vertically integrated railway com- panies argue that such a separation of infrastructure and operations would diminish the advantages of vertical integration and would therefore not be suitable to raise economic welfare. In this paper, we conduct a pan-European analysis to investi- gate the performance of European railways with a particular focus on economies of scope associated with vertical integration. We test the hypothesis that integrated railways realize economies of joint production and, thus, produce railway services on a higher level of efficiency. To determine whether joint or separate production is more efficient we apply an innovative Data Envelopment Analysis super-efficiency bootstrapping model which relates the efficiency for integrated production to a vir- tual reference set consisting of the separated production technology and which is applicable to other network industries as energy and telecommunication as well. Our findings are that for a majority of European Railway companies economies of scope exist.