Vertical Separation in Rail Transport: How do Prices Influence Coordination?

Miguel Amaral and Jean-Christophe Thiebaud – Vertical Separation in Rail Transport: How do Prices Influence Coordination?
Abstract: This paper contributes to the debates over the relative performance of governance modes in network industries. The issues of vertical separation and integration in network industries have been extensively studied from several perspectives including competition effect, production cost synergies or coordination costs.
The aim of this paper is to use the French rail sector example to shed the light on the crucial and understudied impact of coordination costs. We believe indeed that this approach may help identifying drawbacks arising with separation in the sector and, therefore, providing public policy recommendations to prevent those failures when possible.We develop a preliminary model explaining why inefficient outcomes may arise in the railway sector when vertically separated firms have to commit ex ante on quantities. Our first results indicate that credible and effective price regulation can overcome the limits of separation on the infrastructure side. On the other hand, if the market is not flexible enough, it may become harder for railway undertakings to sustain an equilibrium with high outpout as the downstream market is becoming more competitive.