Title: Toc' n' Roll: Bargaining, Service Quality and Specificity in the UK Railway Network
Abstract: As for other public utilities, the legal framework of the rail sector in
Europe has been changing considerably since the early 90s. The Council
Directive 91/440/EEC is the corner-stone of this work of reorganisation: it
initiated the promotion of between the management of the network
and the management of the service, privatisation, and liberalisation of
the service market (i.e. the downstream market). Nevertheless, the application of the European legislation in the different Member States has been quite heterogeneous. In continental Europe there are several examples of railways industries where no effective competition is playing: in most cases, the between the management of the infrastructure and the provision of transport could not help to stimulate the entrance of new operators. On the opposite extreme, the UK system represents a radical benchmark, including both vertical and horizontal unbundling.
After the Railways Act of 1993, the monolithic British Railway was split both geographically and operationally, in more than 100 independent firms, connected by contractual obligations.
We provide a model combining competition for the market and price regulation, whose analytical set-up is inspired by the defining
regulatory feature of the between the Train Operating Company
(TOC) and the ROlling Stock COmpany (ROSCO) in the UK. The national
network is divided into different areas, separated from an operational viewpoint; in each given area, one TOC provides the rail services to passengers, and leases its rolling stock from one ROSCO. Franchises are assigned to TOCs by the Department for Transport, following
a bidding process.
The economic argument supporting this organisation has to do with the promotion of competition. First, participation in the bid does not require a TOC to incur the sunk entry costs related to the acquisition of suitable rolling stock. Second, this arrangement is intended to maintain also ex-post competition, through the possibility that rolling stock material used in one area may be shifted to a different area. However, this interchangeability is negatively affected by the compatibility between the rolling assets and the rails, so that the rolling stock can be considered as a relation specific investment. Besides, against the benefits of competition, are also set the potential drawbacks highlited by the literature on incomplete contracts.
We compare the separation regime chosen for the UK rail network
with the integration regime, typical of most of other continental European
countries. The integration case corresponds to the situation where complete
contracts can be written (and enforced), while the separation case represents the situation where the parties are prevented from merging, or (equivalently) from writing complete long term contracts which specificy in sufficient detail the requirements of the rolling assets to be supplied by the ROSCO to the TOC. In this latter case, the ROSCO choses the train’s design and characteristics by itself, prior to the bid process.
Most of the existing literature focusing on the between the
owner of the rolling assets and the provider of transport services, expressed
its concern with regard to the negative effects on the level of incentives.
More specifically, following the basic insights of the Transaction Costs The-
ory, some contributions pointed out an institutional misalignment, due to the unappropriate vertical between the owner of the assets and the provider of the final transport services (See, for instance, [9] and [10]). At the same time, some authors highlighted the positive effects determined by the competition for the market mechanism on investments (See, for instance, [1] and [6]).
By comparing our integration and separation regimes, we find that, in line with most of the existing literature, investments in specific assets and in effort for quality increase with the degree of vertical integration. Nevertheless, a second original result shows that for a given vertical structure of the industry, an increase of the competitive pressure established by the Regulator brings an adverse effect on the incentives toward specificity (i.e. there is a second-best trade-off between specificity and quality). Finally, in contradiction with the approach referring to the Transaction Costs Theory, our social welfare analysis shows that in a regulated network industry like the UK railways, there might be over-investment for both the dimensions of specificity and quality. Hence, in this case, vertical might be socially preferable to vertical integration.
References:
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Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: article
Access and Citation
Cited By Count: 3
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