The Effect of Access Charges on Social Welfare in the Railway Industry



The Effect of Access Charges on Social Welfare in the Railway Industry

Authors

M Finger, M Laperrouza, EPFL, CH; M Lang, University of Zurich, CH

Description

This paper presents a game-theoretic model of the liberalized railway and analyzes how the government agency will set the access charge for the infrastructure in order to maximize social welfare.

Abstract

Rail access charges remain a central issue in the European rail policy. According to the European Union legislation, Member States have to separate rail infrastructure from operations (at least in accounting terms) and must calculate access charges for the use of the rail infrastructure on a transparent and non-discriminatory basis.

This paper presents a game-theoretic model of the liberalized railway industry in which train operation and ownership of infrastructure is vertically separated. Train operators have to pay a charge to the infrastructure owner for access to the rail infrastructure. Our model incorporates train operators, consumers, the government agency and the infrastructure manager. Moreover, we differentiate two sectors: the passenger and freight sector.

The objective of this paper is to analyze how the government agency will set the access charge for the infrastructure in order to maximize social welfare. We further examine the effect of this price-setting behavior on the competition in the railway sector and the profits of the train operators. We consider two different scenarios. In a first scenario, we assume that there is limited/no competition in the passenger sector and full competition in the freight sector. In a second step, we analyze the scenario in which also the passenger sector is exposed to competition (at least for long-distance passenger traffic).

For our analysis, we use a two-stage, game-theoretic model. This approach enables us to explicitly analyze the interaction between the different players in the railway industry. The basic theoretical model leads to qualitative results. In order to derive quantitative results, which enable us to make more precise predictions and comparisons, we calibrate our model with real-world data from different European countries. More precisely, we derive market shares, optimum prices and welfare measures in a liberalized railway sector by means of a calibrated model with stylized data.

Our paper differs from previous works because it provides a full-fledged, formal welfare analysis of access charges in a European context. With our framework, we are able to explicitly calculate the resulting equilibria for the train operators, consumers, government agency and the infrastructure manager. Moreover, we derive comparative statics, which enable us to explicitly assess the effect of changes in the model parameters on access charges, the profits of the train operators and consumer surplus.

The paper is of interest to train operators, infrastructure managers and regulators in the railway industry. Policy recommendations can be derived of how to optimally set access charges from a social welfare perspective.

Publisher

Association for European Transport