Unbundling and competition on rail

This is an automatic translation of the original Czech paper “Unbundling a konkurence na železnici”

Paper presented at the seminar Telc 2008.

The railway reform on the basis of unbundling, however, has its drawbacks, which also arise from the findings of neo-classical economics. As a result of the unbundling would not be increasing the efficiency of rail transport, but rather the reverse ligation efficiency of individual carriers, resulting in lower customer satisfaction and lower competitiveness of intermodal rail, and an increase in total costs of the industry, which, given the outlet of the fixed costs of budgets carriers could result in a higher burden public budgets. Problems that may potentially threaten the resulting effect of reforms based on unbundling can be summarized in four areas: (i) the existence of economies of scale and structure, (ii) the threat of allocation efficiency by removing decisions about infrastructure from carriers, (iii) the existence of economies of traffic density and (iv) the effect of intermodal competition. This text aims to identify these pitfalls based on knowledge of economic theory and practical experience in railway operation.

first Unbundling from the perspective of neoclassical economics – economies of scale and economies of structures
Economies of scale (economies of scale) are based on the relationship between the input and the total output power operation. If given the technologies used in a particular industry, there is the effect of economies of scale, active against a large number of competitors in the industry and can lead to a situation where the most efficient production is able to achieve only one producer. A larger number of producers in the sector would be despite the positive impact of competition always sub-optimal and the industry as a whole would operate less efficiently and with higher average costs. Logically, the economies of scale apply especially in sectors with relatively high fixed costs. A study based on the analysis using the Cobb-Douglesovy production and cost functions (Keeler 1974 Caves – Christensen – Swanson 1980) have shown that the source of the vast majority of fixed cost infrastructure, ie. land and built infrastructure; similar studies comparing the different modes of transport (eg Winston 1985 Wetzel – Growitsch 2006) have shown that it is the rail, which arise in the context of significant economies of scale.

The existence of another effect, economies of struktury2 (economie of scope), railway transport empirically verified as H. Wetzel and Ch Growitsch (2006). In contrast to the economies of scale that are based on the reduction of average costs for expansion of existing production capacity, the energy savings from the structure associated with a decrease in the average cost of production expansion of new products (in English because sometimes “economies of scope”). A typical example of the railway in this context is the simultaneous provision of passenger and freight transport one carrier (Pietrantonio – Pelkmans 2004, pp. 8, Quinet – Vickerman 2004, pp. 302 et seq). Economies of structures have also their spatial meaning: carriers can increase the efficiency of their services change or an increase of destinations served (in this context are defined by so-called “economies of spatial scope”, see Jara-Díaz – Cortés – Ponce 2001).
As in the case of economies of scale, the results of the analysis of the structure of savings relative to the unbundling entirely clear, intuitions and arguments, however, are directed to the realization that the savings from the structure can be achieved in an environment more vertical integration – that correspond to the empirical study of railways in North America and Japan ( Pietrantonio – Pelkmans 2004) and Europe. H. Wetzel and Ch Growitsch (2006) in their study comparing 54 railway companies from 27 European countries and conclude that ownership unbundling of network operation does not lead to higher efficiency, but on the contrary outweigh the negative effects. The benefits of infrastructure from operations outweighs the structure in case of high traffic density, which can fully demonstrate the benefits of unbundling: higher efficiency of operation due to competition between different operators and at the same time due to economies of scale (Pietrantonio – Pelkmans 2004, pp. 17 and ff).

Second Practical view of unbundling – economies of traffic density and intermodal competition

3rd Breakaway decisions on infrastructure by carriers
Unbundling leads to the separation of a substantial part of the fixed costs associated with the transport route from carriers, ie entities whose rational decision on costs incurred on infrastructure would be key to the competitiveness of the sector. At the same time, however, deciding on the optimal allocation of resources to innovation and development investment is most effective when carried out simultaneously and in interaction between operations and infrastructure within one integrated companies – from an economic point of view this is considered theoretically proven at least since the publication of Ronald Coase (1937, Furthermore Williamson 1975). However, if there is a market power monopoly, a monopoly firm can exploit this position and maximize profits rather than deciding on the efficient allocation of resources, but the price dictates. Therefore, states prevent this danger as a typical instrument of antitrust policy chooses vertical separation, ie the institutional separation of networks from production. In practice, there are many good examples where such a solution works efficiently, such as electricity generation and distribution, and airports and airlines, etc.

4th Bottlenecks railway reform in Europe

We have repeatedly encountered the issue proceeds without mentioning one of the great challenges of unbundling: setting the price for access to rail carriers. It is always difficult, if not based pricing transparent supply and demand – if unbundling is never possible and carries it with him always the risk of system failure. In an environment where the latter is derived from infrastructure investments, these investments do not reflect real demand for them by the carriers, the determination of adequate (in the economic sense of equilibrium) price for using infrastructure nearly impossible. Conversely, in connection with the problem of deciding on investments, price as an indicator of critical information in the event of unbundling fails and can not be used to make decisions about adequate maintenance and investment in various parts of the infrastructure (Pittman 2005, pp. 183).