Towards a liberalised European high speed railway sector: Analysis and modelling of competition using Game Theory

Eur. Transp. Res. Rev. (2013) 5:53–63 DOI 10.1007/s12544-012-0084-7 ORIGINAL PAPER Towards a liberalised European high speed railway sector: Analysis and modelling of competition using Game Theory Aurora Ruiz-Rúa & Roberto Palacín Received: 14 December 2011 / Accepted: 24 August 2012 / Published online: 9 September 2012 # The Author(s) 2012. This article is published with open access at SpringerLink.com Abstract Introduction The liberalisation of the Railways imposed by European Directives introduces competition in a sector traditionally organised largely through national monopolies. As a result, the analysis of the competition particularly on a given route is very recent. Approach The approach and methodologies so far developed to analyse the competition between European rail operators have resulted in interesting but isolated efforts. Developments based on game theory and analysis of strategic decision as part of the organisational economics theory have proven to be the most appropriate. This paper introduces an improvement on these methodologies by using the principles of consumer behaviour theory and the analysis capabilities of game theory to develop a dedicated purposebuilt modelling tool for the analysis of intermodal competition within the operator’s revenue function. To validate the model, a forecast analysis on the Madrid-Barcelona high speed corridor has been performed. Conclusions The resulting model allows quantifying the minimum requirements for a new operator to stay in the market as well as the equilibrium price and level of investment required. Keywords Railways . High-speed . Competition . Liberalisation . Game theory A. Ruiz-Rúa Inter-American Development Bank (IADB), Integration and Trade Sector, 1300 New York Avenue, N.W, Washington, DC 20577, USA R. Palacín (*) NewRail-Centre for Railway Research, Newcastle University, School of Mechanical and Systems Engineering, Stephenson Building, Newcastle upon Tyne NE1 7RU, England, UK e-mail: 1 Introduction During the 1990s the progressive decline of the railway market share in Europe prompted the European Commission to start a deep and fundamental process of transformation. A number of legislative measures grouped into what is known as Railway Packages aimed at gradually creating a competitive single European Railway System were introduced. One of the primary implications of this process is the introduction of competition through the liberalisation of transport service operations. One these recent Directives is focused on the liberalisation of international passenger services [19]. This is a critical step as effectively opened up the passenger market from 2010. This legislation, supported by additional documents such as the Transport White Paper [18] that led to the 2011 version has transformed the European railway system introducing the legal requirement of full legal and commercial separation between infrastructure ownership and service providers. These requirements are the catalysts of a deep restructuring of all national railway companies as well as the newly formed operators willing to enter the market. The level of competition introduced and the pace in which such process is taking place varies between European member States depending on the way and time scales the Directives have been incorporated into the national laws. In some cases, there have been considerable delays in its adoption. In other cases, national monopolies have been drastically reduced or have even disappeared, as is for the now extinct British Rail. The introduction of these European Directives has effectively created two types of structures, namely: & & Independent organisations running the infrastructure and the operations as is the case in countries such as France, UK, Portugal, Sweden, Denmark, Finland, the Netherlands, Spain; Holding organisations integrating both the infrastructure managers and the former state-owned railway operator 54 Eur. Transp. Res. Rev. (2013) 5:53–63 (passenger and freight). Examples include Germany, Belgium and Italy; The differences in adopting these Directives have prompted the need to quantify the level of implementation of the liberalisation process in order to be able to do an accurate comparison. Kirchner [26–29] introduced on behalf of Deutsche Bahn AG1 the Rail Liberalisation Index (LIB Index) widely acknowledged as the reference method to perform such comparison. The LIB Index assesses on a regular basis the level of openness of the rail transport markets within the European Union member States plus Norway and Switzerland. It uses a system of three different indexes based on legal and practical barriers for newcomers (LEX, ACCESS, COM) and four categories (pending departure, delayed, on schedule, advanced) to rank on a scale from 100 to 1,000 points the level of liberalisation. In its more recent edition, only the UK, Germany, Sweden, Denmark, Austria and The Netherlands achieve advanced ranking (800–1,000 points). This means that only these six countries out of twenty-seven have completely incorporated the European Directives and legislation. New railway undertakings willing to access these markets have no significant barriers to do so. However, the LibIndex has its limitations as it only assesses the level of implementation of the existing regulation, referring to it generally as competition level. Knorr and Eichinger [30] performed a critical appraisal of the Lib Index highlighting its key limitations. To analyse the level of competition between operators, economic theory and industrial organisation indicators are widely accepted and acknowledged. In particular, the concentration index and industrial profitability which measure in detail the rates of profit and the market share [48]. To guarantee the future of the railway sector, the analysis of the competition and in particular the access of new operators is required [18]. Therefore, understanding the conditions that allow stable access of new railway operators under the upcoming liberalisation framework is at the core of the analysis carried out and presented in this paper. More specifically, the analysis focuses on the following: – – – – The strategic decisions that incumbent and newcomer operators need to take; The need for maximising profits; The operational costs incurred; The allocation of ticket prices and frequency of services as variables directly influencing competition; Policy and political decisions are not part of the work as they are related to welfare analysis. The model described in this paper aims to illustrate in a simple but effective way the complex web of strategic decisions 1 German National railway a company needs to take in order to survive in a given sector of the economy. In this case the model focuses on the intramodal competition between an incumbent operator and a new operator trying to enter the market. The competition is based on basic variables such as ticket prices, frequency of service, (...truncated)