Advertisement

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

Abstract

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.

Keywords

Railway restructuring Infrastructure Network quality 

JEL Classification

L92 L51 D60 

Notes

Acknowledgments

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

References

  1. Armstrong, M., Doyle, C., & Vickers, J. (1996). The access pricing problem: A synthesis. Journal of Industrial Economics, 44, 131–150.CrossRefGoogle Scholar
  2. Bereskin, C. G. (2009). Railroad economies of scale, scope, and density revisited. Journal of the Transportation Research Forum, 48(2), 23–38.Google Scholar
  3. Bitzan, J. D. (2003). Railroad costs and competition: The implications of introducing competition to railroad networks. Journal of Transport Economics and Policy, 37, 201–225.Google Scholar
  4. Buehler, S., Schmutzler, A., & Benz, M. A. (2004). Infrastructure quality in deregulated industries: Is there an underinvestment problem? International Journal of Industrial Organization, 22(2), 253–267.CrossRefGoogle Scholar
  5. Bureau of Transport and Regional Economics. (2003). Rail infrastructure pricing: Principles and practice. Report 109, Australian Department of Infrastructure and Regional Development. Accessed July 18, 2016, from https://bitre.gov.au/publications/2003/report_109.aspx.
  6. de Rus, G., & Socorro, M. P. (2014). Access pricing, infrastructure investment and intermodal competition. Transportation Research Part E: Logistics and Transportation Review, 70, 374–387.CrossRefGoogle Scholar
  7. Drew, J. (2009). The benefits for rail freight customers of vertical separation and open access. Transport Reviews, 29(2), 223–237.CrossRefGoogle Scholar
  8. European Commission. (2013) The performing rail infrastructure manager. Accessed July 7, 2016, from http://ec.europa.eu/transport/media/publications/doc/2013-the-performing-rail-infrastructure-manager-lo-res.
  9. Forkenbrock, D. (2001). Comparison of external costs of rail and truck freight transportation. Transportation Research Part A: Policy and Practice, 35(4), 321–337.Google Scholar
  10. Gallamore, R., & Meyer, J. (2014). American railroads: Decline and renaissance. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  11. Gargett, D., Mitchell, D., & Martin, L. (1999). Competitive neutrality between road and rail. Canberra: Bureau of Transport Economics.Google Scholar
  12. Growitsch, C., & Wetzel, H. (2009). Testing for economies of scope in European railways: An efficiency analysis. Journal of Transport Economics and Policy, 43(1), 1–24.Google Scholar
  13. Haucap, J., & Klein, G. J. (2012). How regulation affects network and service quality in related markets. Economics Letters, 117(2), 521–524.CrossRefGoogle Scholar
  14. Ivaldi, M., & McCullough, G. (2008). Subadditivity tests for network separation with an application to U.S. railroads. Review of Network Economics, 7(1), 159–171.CrossRefGoogle Scholar
  15. Kopicki, R., & Thompson, L. S. (1995). Best methods of railway restructuring and privatization. World Bank, Cofinancing and Financial Advisory Services. Discussion Paper: CFS. 111.Google Scholar
  16. Kurosaki, F. (2008). An analysis of vertical separation of railways. Ph.D. thesis, University of Leeds.Google Scholar
  17. Laffont, J.-J., Rey, P., & Tirole, J. (1998a). Network competition: I. Overview and non-discriminatory pricing. RAND Journal of Economics, 29(1), 1–37.CrossRefGoogle Scholar
  18. Laffont, J.-J., Rey, P., & Tirole, J. (1998b). Network competition: II. Price discrimination. RAND Journal of Economics, 29(1), 38–56.CrossRefGoogle Scholar
  19. Laffont, J.-J., & Tirole, J. (1993). A theory of incentives in procurement regulation. Cambridge, MA: MIT Press.Google Scholar
  20. Laffont, J.-J., & Tirole, J. (1994). Access pricing and competition. European Economic Review, 38, 1673–1710.CrossRefGoogle Scholar
  21. Laffont, J.-J., & Tirole, J. (1996). Creating competition through interconnection: Theory and practice. Journal of Regulatory Economics, 10(3), 227–256.CrossRefGoogle Scholar
  22. Lewis, T., & Sappington, D. (1999). Access pricing with unregulated downstream competition. Information Economics and Policy, 11(1), 73–100.CrossRefGoogle Scholar
  23. Nash, C. (2008). Passenger railway reform in the last 20 years-European experience reconsidered. Research in Transportation Economics, 22(1), 61–70.CrossRefGoogle Scholar
  24. Nash, C. A., Smith, A. S., van de Velde, D., Mizutani, F., & Uranishi, S. (2014). Structural reforms in the railways: Incentive misalignment and cost implications. Research in Transportation Economics, 48, 16–23.CrossRefGoogle Scholar
  25. OECD. (1997). Railways: structure, regulation and competition policy. Accessed July 14, 2016, from http://www.oecd.org/regreform/sectors/1920239.
  26. OECD. (2013). Recent developments in rail transportation services. Accessed May 19, 2016, from http://www.oecd.org/daf/competition/Rail-transportation-Services-2013.
  27. OECD, International Transport Forum. (2008). Charges for the use of rail infrastructure. Accessed July 18, 2016, from http://ec.europa.eu/transport/modes/rail/doc/2008_rail_charges.
  28. OECD, International Transport Forum. (2014). Freight railway development in Mexico. Accessed May 19, 2016, from http://www.itf-oecd.org/freight-railway-development-mexico.
  29. Pittman, R. (2004a). Russian railway reform and the problem of non-discriminatory access to infrastructure. Annals of Public and Cooperative Economics, 75(2), 167–192.CrossRefGoogle Scholar
  30. Pittman, R. (2004b). Chinese railway reform and competition: Lessons from the experience in other countries. Journal of Transport Economics and Policy, 38(2), 309–332.Google Scholar
  31. Pittman, R. (2007). Options for restructuring the state-owned monopoly railway. In S. Dennis & W. Talley (Eds.), Railroad economics: Research in transportation economics (pp. 179–198). Amsterdam: Elsevier.Google Scholar
  32. Pittman, R. (2011). Risk-averse restructuring of freight railways in China. Utilities Policy, 19(3), 152–160.CrossRefGoogle Scholar
  33. Rong, Z., & Bouf, D. (2005). How can competition be introduced into Chinese railways? Transport Policy, 12(4), 345–352.CrossRefGoogle Scholar
  34. Sánchez, P. C., Monsálvez, J. M. P., & Martínez, L. S. (2008). Vertical and horizontal separation in the European railway sector. Working paper No. 12. Instituto Valenciano de Investigaciones Económicas.Google Scholar
  35. Sand, J. Y. (2012). Infrastructure quality regulation. Transport Policy, 24, 310–319.CrossRefGoogle Scholar
  36. Sappington, D. (2006). On the merits of vertical divestiture. Review of Industrial Organization, 29, 171–191.CrossRefGoogle Scholar
  37. Shaoul, J. (2007). Leasing passenger trains: The British experience. Transport Reviews, 27(2), 189–212.CrossRefGoogle Scholar
  38. Shubik, M., & Levitan, R. (1980). Market structure and behavior. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  39. TERI. (2009). Competition issues in regulated industries: case of the Indian transport sector: railways and ports. The Energy and Resources Institute, New Delhi. Accessed May 19, 2016, from http://www.cci.gov.in/sites/default/files/transport_20090723115524.
  40. Vidaud, M., & de Tilière, G. (2010). Railway access charge systems in Europe. In 10th conference paper on Swiss Transport Research Conference (STRC 2010). Accessed July 8, 2016, from http://www.strc.ch/conferences/2010/Vidaud.
  41. Weber, B., & Alfen, H. W. (2010). Infrastructure as an asset class. West Sussex: Wiley.Google Scholar
  42. Wu, J., Nash, C., & Wang, D. (2014). Is high speed rail an appropriate solution to China’s rail capacity problems? Journal of Transport Geography, 40, 100–111.CrossRefGoogle Scholar
  43. Yuanyuan, J., & Wen, C. (2009). A study on the feasibility of vertical separation model in China’s railway industry. Industrial Economics Research, 6, 73–79. (in Chinese).Google Scholar
  44. Zhao, J. (2005). Boundary problem of firm in restructuring China railways. China Industrial Economics, 1, 63–70. (in Chinese).Google Scholar

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

Personalised recommendations