Welfare effects of open access competition on railway markets

Abstract

In recent years, several countries have deregulated passenger railway markets to allow open access. The aim is for competition to lower fares and increase quality of service, thereby increasing demand, economic efficiency and overall social welfare. We use a stylised simulation model to study how open access competition affects fares, demand, supply, consumer surplus and operator profits compared to a profit maximising monopoly and to a welfare maximising benchmark situation. We conclude that aggregate social welfare increases substantially when going from profit maximising monopoly to duopoly competition, as consumers make large gains while operators’ profits fall. It matters how the infrastructure manager sets the timetable based on operators’ capacity requests: the infrastructure manager should strive to increase competition by mixing competing operators’ departures as much as possible. According to simulations, there generally exists a stable competitive Nash equilibrium with two or more profitable operators. Although operators are identical in the model setup, the Nash equilibrium outcome is asymmetric: one operator has more departures and higher average fares than the other does. If operators are allowed to cooperate, however, for example by trading or selling departure slots, the equilibrium situation tends to revert to monopoly. The regulatory framework must therefore prevent collusion and facilitate market entry. Even the potential for competitive entry tends to increase social welfare, as the monopolist has incentives to increase supply as an entry deterrence strategy.