Transaction and transition costs during the deregulation of the Swedish Railway market

Abstract

The research on regulatory reform has identified and measured three types of costs associated with the shift from monopoly to competition: transaction costs, misalignment costs and transition costs. In this article we use a case study approach to measure and compare these costs during the deregulation of the Swedish railway system from 2000–2015. Our case studies confirm earlier research that vertical separation and the introduction of competition in the railway markets result in comparatively small direct transaction costs. Extraordinary transaction costs in the form of interrupted contracts are also a minor problem for the railway system as a whole but might create major problems for the affected region. Our research concurs with earlier research on the British railway system and a CER study that misalignment costs seem to be significantly bigger and more troublesome to handle than direct transaction costs. Railway maintenance costs in Sweden using competitive tenders are increasing four to five times faster than railway operations with no measurable improvement in performance. Transition costs have been and continue to be important in the deregulated Swedish railway system. First, procrastination in the form of delayed changes in the allocation of train paths results in misalignment costs that seem to be growing. Second, adjustment costs in the form of handouts to the former monopolist have been ten times higher than the costs for interrupted contracts.