Economic changes from railways

• Published in: EuroEconomica Vol. 32; no. 3; pp. 55 - 62
• Main Author: Dediu, Magdalena
• Format: Journal Article
• Language: English
• Published: 01.01.2013
• Subjects: Costs; Economic change; Economic incentives; Market failure; Railway networks; Railways
• ISSN: 1582-8859; 1582-8859

In this study, we look at the potential impact of different forms of vertical organisation of railway markets on costs and mode share. Several points come out of the literature review: the effects of vertical separation in terms of induced cost increases resulting from misalignment of incentives are likely to be larger than the increased transaction costs. The efficient setting of track access charges is very important, but cannot by itself lead to the correct alignment of incentives regarding both efficient use and efficient development of the rail network. Whilst past studies generally find that increased competition reduces costs, they show no consistent pattern on the impact of vertical separation on costs.There seems to be no evidence that vertical separation is unconditionally superior or inferior to other structures. Our new econometric evidence suggests that at higher traffic densities, vertical separation In this study, we look at the potential impact of different forms of vertical organisation of railway markets on costs and mode share. We distinguish between three general models: Vertical Integration, Holding Company and Vertical Separation. Several points come out of the literature review: the effects of vertical separation in terms of induced cost increases resulting from misalignment of incentives are likely to be larger than the increased transaction costs.The efficient setting of track access charges is very important, but cannot by itself lead to the correct alignment of incentives regarding both efficient use and efficient development of the rail network. Whilst past studies generally find that increased competition reduces costs, they show no consistent pattern on the impact of vertical separation on costs. There seems to be no evidence that vertical separation is unconditionally superior or inferior to other structures. Our new econometric evidence suggests that at higher traffic densities, vertical separation increases costs;whilst at lower densities it appears to reduce them. At mean traffic densities, vertical separation does not significantly change costs,whereas a holding company model reduces them, compared with complete vertical integration. We find that a high dependence on freight traffic for revenue appears to increase the costs of vertical separation. For a given level of train density, it seems that freight traffic causes more coordination problems in a separated environment than passenger traffic.We find no evidence that vertical separation is superior to the holding company model in its impact on rail's modal share in freight or passenger traincreases costs;whilst at lower densities it appears to reduce them. At mean traffic densities, vertical separation does not significantly change costs, whereas a holding company model reduces them, compared with complete vertical integration. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are, exacerbated by no less than technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the grow th of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, a combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs might be superior in terms of competition, market growth and regulatory oversight. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient.