Fundamental Economic Analysis Problem Set #7 Spring 2017

2005

Given the structure of the railway network, what is the optimal structure of services to be offered to rail travelers? More precisely, what is the (optimal) frequency of services and at what price should it be tariffed when one does take into account the complex network externalities that makes the flows inter-dependent? The paper is made of two parts in which we address theses question from three successive points of view. particular cost structure (high fixed costs, no marginal costs), the profitmaximising strategies are no characterised in term of markup, but in term of price elasticity. More precisely, prices should be such that the price elasticity of demand equates one. The profit maximising frequency is again defined by a formula that links the average travelers' waiting time costs with the average costs. Lastly, we examine the second-best social optimum, i.e. the structure of services that maximizes social benefits and allows the operator to break-even. This is usually the objective that is assigned to public services. The second part of the paper deals with the effect of network externalities on the optimal allocations introduced above. One of the specificity of rail is indeed that the characteristics of the different journeys are not independent from each other. More specifically, the price and frequency of services on one link directly impact the price and frequency of the journeys that encompass that link. We consider a linear network and analyze the optimal strategies as a function of the demand for the various journeys. It appears that optimal prices do not necessarily refer to the (aggregate) price elasticities for the considered link, but to a weighted average of price elasticities for the various services that make use of that link. We identify in which circumstances it will be the case for the network that is considered and exhibit the optimal pricing formulae for the different objectives already introduced (social welfare, profit maximization and constrained social welfare). Also the analysis is limited to the study a very simple network, it does highlight the specificities of the rail industry by taking into account the cost structure and the interdependency of the various flows. We thus believe that this is a first but important step toward a better understanding of the sector.

2002

This article presents an econometric analysis of the maintenance costs for the Austrian railway system. The data contain observations of track maintenance costs from 1998 to 2000. Our analysis identifies the cost driving factors in order to determine estimates of marginal costs, as required by the infrastructure provision principles of the European Union. The analysis identifies the variables "track length" and "transported gross-tons" as the principal cost determinants. Furthermore, we observe that total costs as well as marginal costs increase with (i) a high proportion of the track occupied by train stations, (ii) the number of switches within a track, (iii) narrow bends, and (iv) considerable slopes. Moreover average as well as marginal costs for secondary lines are significantly higher than for main lines.

2007

2005

During the last two decades a deregulation trend has flourished. In Western Europe this trend commenced within local and regional public transport. The privatisation of the English bus industry, even the long distance coach services, represents the "full market solution", where both supply, prices and the operation are in the hands of competing profit maximising firms. In the Nordic countries and in London, and to some extent in the US and France, the decision over local and regional public transport supply and prices has been kept in the hands of a public authority, while the actual operation is left for competition through tendering. Typically these services need local or central government grants for financing-and there are economic rationales for this. Rail transport has in most countries so far been left in the hands of government-controlled bodies, but two exceptions are Great Britain and Sweden. In Great Britain the railway has been split into Railtrack (first public sector organisation, then privatised and then in practice public sector organisation again) and private operators. In Sweden the Swedish Rail (SJ) has been split into a social welfare oriented Railway Administration (Banverket) responsible for infrastructure investments (financed by the government) and the "commercial" new SJ, with the aim to operate the service at a minimum profit determined by the government. SJ still enjoys monopoly for the commercially viable lines for passenger transport, while the non-viable ones are put out for tender by a new government agency (Rikstrafiken). The aim of this paper is to try to find how one should shape policy intervention in passenger transport markets where there is free competition between operators. One should then first firstly investigate to what extent profit maximising competing operators do not act in accordance with welfare maximisation. An earlier paper, K. Jansson (2001), examined the discrepancy between profit and welfare ♣ The Swedish National Rail Administration has financed this work.

2002

ABSTRACT This study analyses cost and revenue inefficiencies for a sample of European railway companies. On the basis of a DEA model we calculate cost and revenue inefficiencies, decomposing them into inefficiencies of a technical or allocative type. It is observed that inefficiencies in revenues are greater than those in costs, indicating that the study of inefficiencies in costs is only a partial analysis of the problem. Also, technical inefficiencies are greater than the allocative type.

Ijrare, 2020

Rail system is considered as the most efficient mode of freight transportation. While it may be expected that demand of rail mode would be higher than other means of transportation, sometimes it has been observed that road transportation is much more applicable. Therefore, economic aspects of transportation market such as process and access charges are prominent. It must be considered that rail transportation has its own drawbacks. Low flexibility and fixed origins and destinations, as well as the relatively high rate of access charges are regarded as the most problematic limitations of rail systems. In current study, an evaluation is carried out using game theoretic approaches in order to determine demands of two competing systems including rail and road. Moreover, Stackelberg approach is utilized in order to calculate optimal access charge of rail infrastructure which maximizes profit of government. The results and findings of current study may contribute policy makers for decision-making in a competitive freight transportation market.

1979

Cost functions for railroad firms are an important element of management decision-making. They are also a principal basis for regulatory policy. Standard ICC cost-finding procedures which are based on a number of untenable assumptions regarding, the allocation of common and joint costs, are inadequate. Furthermore, traditional econometric attempts at rail cost estimation generally have suffered from extensive aggregation of firms, insufficient disaggregation of output, and inadequate representation of the physical process of producing services. This paper presents the results of estimating a rail cost function using a new technique based on incorporation of engineering models of the pro duction process into the econometric estimation process. The data base is a time series comprising nine years of monthly data from a single railroad, in cluding detailed information on both operations and financial transactions. The major contribution of this work is the explicit incorporation of engineering performance models in the analysis. This allows the inclusion of a measure of service quality, average speed of shipment, as a character istic of the firm's output. This inclusion provides a significant first step in allowing management to better understand the cost implications of improving service quality. The basic structure developed in this paper is flexible enough to allow other measures of service quality, such as trip time reliability and loss-and-damage, to be included.

Asian Institute of Transport Development, 2000

This paper goes into various aspects of the rail system, and in the context of India brings out the importance of a comprehensive overall view. The paper starts off by first going over the rail system in India as it operated today. The importance of freight for the economy, the importance of certain routes that account for the bulk of rail transport, how rail has been losing out to the road, etc. The next section entitled “The Future” reflects upon how the Indian demographics are changing and how the changes in various technologies are going to affect the need and environment of transport in general and rail transport in particular. Next to the paper briefly introduces the need for debate on private vs. public operations of rail services– these are all done in the context of pricing issues. The need for regulation is put forth as essential, even if rail transport were to completely remain in the public fold. The next section takes up from that task and outlines the various costs that affect the rail system, and how though private would be expected to increase efficiency and reduce economic costs, need for greater regulation would bring out ‘regulatory costs’. Moreover, transaction costs would also be expected to increase. Therefore greater private entry would reduce overall costs and increase overall efficiency is not a certainty. How would regulation affect pricing decisions come up next, it is found that regulation is ‘costly’ in the sense that it would require great efforts in generating adequate and credible information. The next section goes into other regulatory aspects that have a direct bearing on efficiency, that of infrastructure and access to it, as well as quality considerations in regulation. An important issue is the need to generate a large number of resources from within the rail system so as to ensure surpluses that can be used for investment or cross-subsidizing socially necessary activities. Various options for generating resources are outlined in the section entitled “Other Sources of Revenue”. Telecoms, power distribution, advertising, are some such examples discussed there. The next two sections on duality and the economic geography aspects are the last two that build up to the pricing related sections. These sections discuss the peculiarities of the Indian economy. They state that duality of the Indian economy is an advantage where pricing is concerned, and the duality should be exploited in generating adequate revenues. The last four sections are all devoted to various aspects of pricing Regulation, equity and sustainability are discussed here. This paper puts forth the argument that regulation would be costly for the economy, but at the same time is necessary. That regulation is required even if there was no private sector entry. Those efficiency considerations should enter the subsidy and cross-subsidy debate and that ‘travel vouchers’ distributed through the ration system already in place is a viable more efficient alternative to cross-subsidization. There are different systems of regulation and with improvements in information technology, both monitoring and measurement are easier facilitated. The regulator would have to have access to the internal information systems of the operators. This argument forms the basis of the section on regulation and pricing. The section on elasticities puts forth the argument that empirical evidence supports the prior that rail travel demand is not highly sensitive to prices and therefore regulating prices would be important whether the services are provided by the government or by private entities. The concluding note summarizes the main aspects of the discussion and points to the way forward.