Elsevier

Transport Policy

Volume 58, August 2017, Pages 53-61
Transport Policy

Imperfect competition in a network industry: The case of the European rail freight market

https://doi.org/10.1016/j.tranpol.2017.04.014Get rights and content

Highlights

  • The analysis reveals positive signs of increasing competition.

  • Operators are developing strategies of differentiation and new business models.

  • We observed an increase in the number of newcomers after European liberalisation.

  • There are still barriers on the market caused by imperfections in the single market.

  • Current databases should be updated to include data on newcomers.

Abstract

Purpose

This paper opts for a time varying approach to measure the competition on the European rail freight sector according to two questions: what is the current level of competition and how is this expected to evolve in the long run?

Approach

A firm-level dynamic panel estimates the persistence of profit in the European rail freight sector.

Main findings

The persistence of profits shows a high degree of competition in the short run but imperfect in the long run due to the existence of barriers on the market. Secondly, the ratio between capital and labour cost is calculated. It indicates moderate economies of scale.

Originality

Knowledge about this new market and the dynamics are limited in the academic literature. The research is relevant for the policy makers to monitor the rail freight market and to harmonise the practices between network managers to improve the European single market.

Introduction

The European Commission has supported free competition on the European rail market since 1991 (1991/440/EEC). The goals are twofold: to increase efficiency and to develop a single market in accordance with the common transport policy defined by the Treaty of Rome (1958). More than 20 years later, however, it is only the rail freight market that is open to free competition: in 2007 (2004/51/EC), rail freight shifted from national-level markets with monopolies and cooperation to a European-level market with free players and competition. In this paper, the main objective is to assess the coherence between the European goal of the single market and the rail freight market by answering two questions:

  • What is the current level of competition?

  • How is competition expected to evolve in the long term?

Knowledge about this topic is limited at the European level. This applies to the academic literature, where most analyses are based on comparisons of incumbents’ efficiency (De Borger, 1992, Cantos and Maudos, 2001, Friebel et al., 2010), on national approaches (Vierth, 2011, Laisi et al., 2012, Woodburn, 2014) or on aggregate approaches for the European market (Crozet et al., 2014, Gevaers et al., 2015). It also applies to the European Commission, whose market monitoring addresses only the industry level and uses aggregate data. In general, the analysis of competition and its dynamics on the European rail freight market is incomplete because of a lack of data and the belief that railway transportation is characterised by high barriers between national markets and high sunk costs, leading to reduced chances of successful competition (Brewer, 1996, Crozet et al., 2014, Nash and Preston, 1992, Vierth, 2011, Woodburn, 2014). Analyses are often limited to the identification of barriers and the comparison of market share between incumbents and newcomers. No deep analyses have been made of firm behaviour or market structure, though other sectors do this routinely using industrial economics (Mueller, 1977, Tirole, 1988, Lipczynski et al., 2013).

This study proposes a new approach to competition analysis through firm behaviour on the rail freight market. We analyse competition at firm level using an indicator developed by industrial economics: persistence of profit (POP). Data was collected on a selection of firms across Europe, covering the time period between 2007 and 2014. POP was able to provide us with a dynamic picture of each firm's behaviour by measuring its average profit and the persistence of profit from one year to the next.

The organisation of this paper is as follows. Section 2 begins by painting a general picture of the freight market in Europe and demonstrating the current lack of knowledge about competition on this market. Section 3 then presents the methodology we used to assess the degree of competition in the short and long term based on the POP principle. In Section 4, the database is described. Section 5 provides an overview of the results. Finally, Section 6 discusses the results and suggests that the only objective reasons for a low degree of competition on the European market are the imperfections of the single market (barriers to entry/exit) and a lack of market regulation, which leads to a high degree of concentration. Section 7 concludes by emphasising the need for European regulation to manage competition and ensure an efficient market.

Section snippets

Context: liberalisation in 2007 and impacts on the European rail freight market in 2014

European rail freight liberalisation changed the paradigms of the market from national markets and monopolies into a single European market with competition. The goal was to find a solution to the decline of the railway freight market in Europe and to its lack of competitiveness compared to road freight (91/440/EEC). In this section, we provide a short overview of the rail freight market and the related literature in order to clarify doubts about the effect of liberalisation since 2007 and the

Persistence of profit (POP) analysis: measure of competition

This section paints a dynamic picture of competition on the market through the persistence of profit (POP) indicator. POP is commonly used in industrial economics to measure the degree of competition and number of barriers on the market over time (Mueller, 1977, Mueller, 1986, Mueller, 1990, Lipczynski et al., 2013, Sys, 2010, Sys, 2013). Moreover, it can be calculated with simple data in comparison to other indicators like the Panzar-Rosse model or the Boone indicator, the data needs of which

Data collection: a new database

In this section, we propose a new type of database and source for studying the rail freight market. Usually, the rail freight market is analysed using volume data (ton-km or train-km) and simple financial data (turnover). However, POP assessments require more specific data on the financial characteristics of the firms in question. In what follows, we highlight the limits of traditional databases when it comes to the financial approach before describing the newly proposed database. Finally, we

Results: does profit persist?

Table 3 ranks in descending order the results of the POP analysis according to the short-term persistence (λi). The results for the industry (average of all firms) reveal a good level of competition in the short term (section 5.1) but persistence of barriers in the long term (section 5.2).

Discussion: strategies of competition and consolidation

In what follows, we discuss the results of both competition and consolidation strategies in three sub-sections. Section 6.1 analyses firms’ paths using a synthesis of results from the POP and C/L ratio analyses. Section 6.2 describes the movement of consolidation on the market. Section 6.3 discusses the risks associated with a high degree of market concentration.

Conclusion and policy recommendations

This analysis of competition on the European rail freight market reveals active competition between firms. The methodology and results provide greater insights than more traditional analyses, largely due to the application of new indicators for the rail freight market such as persistence of profit and the ratio of capital cost to labour cost.

Those indicators show positive signs of increasing competition and attractiveness on the market in spite of the non-evident impact of liberalisation at

Acknowledgement

The authors are grateful to Katrien de Langhe and Laurent Guihéry for helpful discussions and referees for useful comments. The Belgium program for research (Belspo) (ITF-OECD 2017) provided financial support for this research.

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  • Cited by (0)

    1

    Florent Laroche is assistant professor at the University of Lyon 2 (France) and associated to the Transport, urban planning and economics laboratory (LAET).

    2

    Christa Sys currently is holder of the BNP Paribas Fortis chair on transport, logistics and ports at the Department of Transport and Regional Economics.

    3

    Thierry Vanelslander currently is tenure track assistant professor at the Department of Transport and Regional Economics.

    4

    Eddy Van de Voorde is Full Professor at the University of Antwerp, Faculty of Applied Economics. His activities are situated in Maritime Economics, Port Economics, Air Transport and Logistics.

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