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The Static-Dynamic Efficiency Trade-off in the US Rail Freight Industry: Assessment of an Open Access Policy

Author

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  • Coublucq Daniel

    (Compass Lexecon, Brussels, Belgium)

  • Ivaldi Marc

    (Toulouse School of Economics, Toulouse, France)

  • McCullough Gerard

    (Department of Applied Economics, University of Minnesota, Minneapolis, MN, USA)

Abstract

Considering the US railroad industry, which is characterized by seven integrated firms that provide freight services on tracks they own and maintain, this paper provides a structural model that allows to evaluate the potential effects of opening the rail network to new firms on prices and investment incentives. In particular, we propose a framework for analyzing the tension between static efficiency (pricing behavior) and dynamic efficiency (investment behavior). The investment behavior is rendered endogenous by means of a dynamic model where the current investment depends on the expected future profits. We then use a forward simulation procedure to analyze the effect of an open-access market structure where a new firm uses the network of one of the biggest railroad firm. Under a simple access charge equaled to the marginal cost of access, investment in network infrastructure decreases by 10% per year, leading to a significant decrease in network quality over time. Under this setting, despite the increase of price competition, the decrease in network quality leads to a fall in consumer welfare. Other types of (more evolved) access charges might even allow to relax the tension between static efficiency and dynamic efficiency, allowing more price competition while preserving investment incentives. This topic deserves further research and is beyond the scope of this paper.

Suggested Citation

  • Coublucq Daniel & Ivaldi Marc & McCullough Gerard, 2018. "The Static-Dynamic Efficiency Trade-off in the US Rail Freight Industry: Assessment of an Open Access Policy," Review of Network Economics, De Gruyter, vol. 17(4), pages 267-301, December.
    • Handle: RePEc:bpj:rneart:v:17:y:2018:i:4:p:267-301:n:1
    DOI: 10.1515/rne-2018-0009
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    Cited by:

    1. Wilfried Sand-Zantman & Jérôme Mathis, 2014. "Competition and Investment: What do we know from the literature?," Working Papers hal-02316767, HAL.
    2. Coublucq, Daniel, 2013. "Econometric analysis of productivity with measurement error: Empirical application to the US Railroad industry," DICE Discussion Papers 95, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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    More about this item

    Keywords

    competition; dynamic structural models; investment; open-access; railroad industry; static-dynamic efficiency trade-off;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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