Journal of Regulatory Economics

, Volume 50, Issue 2, pp 164–206 | Cite as

Railway restructuring and organizational choice: network quality and welfare impacts

  • David Besanko
  • Shana Cui
Original Article


This paper compares alternative ways of structuring competition in a railway system: vertical separation (VS) and horizontal separation (HS). We compare each structure in terms of its impact on network quality, consumer surplus and social welfare. To do so, we use a two-stage game under HS and a three-stage game under VS to derive Nash equilibrium network qualities, consumer surplus and social welfare, respectively. We highlight four distinct incentive effects that shape network quality under each structure, and we point out that, on balance, they tend to favor higher network quality under HS. However, intensity of transport service competition under each system also plays a critical role in shaping consumer surplus and social welfare. The best case for HS occurs when there is a moderate amount of price competition between the vertically integrated systems, while the best case for VS occurs when there is intense price competition between transport operators. Using computational analysis, we show that it is more likely that HS dominates VS on all three performance metrics.


Railway restructuring Infrastructure Network quality 

JEL Classification

L92 L51 D60 



We thank Qiqin Dai, Robert Gallamore, Russell Pittman, Hanyu Shi, and two anonymous referees for their helpful comments and suggestions.


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Kellogg School of ManagementNorthwestern UniversityEvanstonUSA
  2. 2.School of Economics and ManagementBeijing Jiaotong UniversityBeijingChina

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