Compensation and coordination mechanisms on China's railway public transportation service

Abstract

The State Railway Administration (SRA) of the People's Republic of China and the China Railway Cooperation (CRC) were established as a result of the Ministry of Railways reform in 2013, the aim of which was to separate the functions of administration management and business operations. Due to the lower profitability of the public transportation service offerings, it was of vital importance to increase the operational incentives of the CRC while satisfying to a larger extent the demands of public transportation service. However, under the current separation mode, there is a lack of efficiency in the provision of public transportation services. Establishing a subsidiarity pricing mechanism for railway transportation serving the public welfare, subsidiarity methods, and appropriate compensation plans targeting the loss caused by delivering public welfare services is necessary to deepen railway transport reform. To solve this issue, we establish a game-theoretical framework where the CRC decides on the wholesale price and the SRA determines how much to procure. We obtain the optimal wholesale price and the corresponding procurement quantity decisions. We show how revenue-sharing contracts can coordinate the government and enterprise relationship when market participants are endowed with different market powers. We find that under a scenario in which the cutting ratio lies in the middle range, both market participants are better off than when under a decentralized scenario. Moreover, we provide comparative statics to show the impacts of different parameters on the optimal decisions.