Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network

Gianni De Fraja (), Emanuela Michetti and Piercarlo Zanchettin

No 09/7, Discussion Papers in Economics from Department of Economics, University of Leicester

Abstract: The paper studies the regulatory design in an industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC’s incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may in fact be preferable from a welfare viewpoint.

Keywords: Network regulation; Railways; Incomplete contracts; Relation specific investment (search for similar items in EconPapers)
JEL-codes: D2 L1 L5 L92 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-net and nep-reg
Date: 2009-02
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Working Paper: Toc 'n' Roll: Bargaining, Service Quality and Specificity in the UK Railway Network (2008)
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