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Welfare Effects of Open-Access Competition on Railway Markets

Emanuel Broman () and Jonas Eliasson ()
Additional contact information
Emanuel Broman: CTS - Centre for Transport Studies Stockholm (KTH and VTI), Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden

No 2018:12, Working papers in Transport Economics from CTS - Centre for Transport Studies Stockholm (KTH and VTI)

Abstract: In recent years, several countries have deregulated passenger railway markets to allow open access. The aim is for competition to lower fares and increase quality of service, thereby increasing demand, economic efficiency and overall social welfare. In this paper, we use a stylised simulation model to study how open access competition affects fares, demand, supply, consumer surplus and operator profits compared to a profit-maximising monopoly and to a welfare-maximising benchmark situation. We conclude that aggregate social welfare increases substantially when going from profit-maximising monopoly to duopoly competition, as consumers make large gains while operators’ profits fall. According to simulations, there generally exists a stable competitive Nash equilibrium with two or more profitable operators. Although operators are identical in the model setup, the Nash equilibrium outcome is asymmetric: one operator has more departures and higher average fares than the other. If operators are allowed to collude, however, for example by trading or selling departure slots, the equilibrium situation tends to revert to monopoly: it will be profitable for one operator to buy the other’s departure slots to gain monopoly power. The regulatory framework must therefore prevent collusion and facilitate market entry. Even the potential for competitive entry tends to increase social welfare, as the monopolist has incentives to increase supply as an entry deterrence strategy.

Keywords: open access; rail reform; capacity allocation; passenger (search for similar items in EconPapers)
JEL-codes: D43 R41 R48 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2018-08-23
New Economics Papers: this item is included in nep-cmp, nep-com, nep-gth and nep-tre
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Related works:
Journal Article: Welfare effects of open access competition on railway markets (2019) Downloads
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