How Can the Impact of Competition Be Assessed Within a Cost–benefit Analysis Framework?



How Can the Impact of Competition Be Assessed Within a Cost–benefit Analysis Framework?

Authors

Remi Martins-Tonks, Oxera Consulting LLP, Andrew Meaney, Oxera Consulting LLP

Description

This paper offers a framework for how the impact of competition can be assessed within a cost–benefit analysis framework. It will draw on relevant literature to develop this framework and then compare it against case studies.

Abstract

Competition effects occur when the number of firms in a market changes or when the extent to which firms compete with each other changes. Such changes can affect prices and/or the quality of the product being offered to consumers. This paper will evaluate how such effects can be captured within transport appraisal.

The impacts of transport polices and projects are usually assessed using cost–benefit analysis (CBA). This will involve quantifying the impact on users, which may include the benefits from decreased travel time and/or reduced prices. However, while there are standard frameworks and guidance that can be used to quantify such user benefits, the literature is less clear on how the impact of changes in the competitive environment arising from a change in policy or infrastructure can be quantified using CBA. For example, the UK Department for Transport’s guidance (WebTAG) does not include specific guidance on quantifying competition impacts. This is despite substantial changes to legislation at European level in recent decades (e.g. Articles 101 and 102 providing a competition law framework, and Article 107 on state aid control) that put competition policy very much at the heart of policy development.

The paper will offer a framework for how competition impacts can be quantified within a CBA assessment. We will first review the existing literature on how competition impacts can be assessed when appraising transport infrastructure investment or polices.

We will then develop a framework for quantifying such impacts. This will include focusing on the different effects that can occur from competition: price changes; frequency changes; and service quality changes. A methodology for quantifying these impacts will then be outlined. One key issue will be distinguishing whether such effects are additional to other user benefits. For example, an increase in aviation capacity will increase the supply of air travel, which can lead to a decrease in air fares and thus benefit passengers. However, will there also be a further decrease in fares due to competition? Or does the initial drop in air fares reflect any competition impact that might occur?

Following this, we will analyse case studies across transport sectors to illustrate how they fit within the competition impact framework. This will include increasing aviation capacity in the UK, with a focus on how an additional runway at one of London’s airports could affect competition between airlines and airports, and how this would subsequently affect prices, connectivity and service quality. We will also consider the impact that allowing open-access train operators to compete against incumbent operators has on prices and quality.

In conclusion, we will aim to outline a clear structure for how quantifying competition impacts can be approached within the CBA framework. Given the current absence of such a framework, we believe this paper offers a first step in providing such an approach that might help to make the appraisal of transport projects more complete.

Publisher

Association for European Transport