Does vertical separation reduce cost? An empirical analysis of the rail industry in European and East Asian OECD Countries

Abstract

The main purpose of this study is to analyze structural separation policies, especially vertical (i.e. operation-infrastructure) and horizontal (i.e. passenger-freight service) separation. Using the total cost function of a railway organization, we evaluate whether or not vertical separation and/or horizontal separation can reduce costs. For this analysis, we selected 30 railway organizations in 23 European and East Asian OECD countries over 14 years, from 1994 to 2007. Our findings show that horizontal separation reduces railway cost. As for vertical separation, effects change according to the train density of a railway organization. With lower train density, vertical separation tends to reduce cost, while with higher train density vertical separation increases cost.