China's high-speed rail industrial organization structure reform under inter-modal competition

Abstract

China has an independent high-speed railway (HSR) system that is different from ordinary railways. Compared to conventional rail, HSR faces more competition from transport such as aviation, since its faster speed. Designing an industrial organization structure suitable for HSR is a key issue to be solved in furthering the reform of the China railway industry. By constructing a Salop model with horizontal differentiation, we analyze the economic effects of implementing different industrial organization structures for HSR under the condition of inter-modal competition. The study found that introducing train operators or establishing regional companies may lead to foreclosure effects under the vertical integration (VI) structure. Under the vertical separation (VS) structure, introducing train operators or establishing regional companies can promote competition, but it easily leads to double marginalization problem. Regardless of the structure, whether VI or VS, introducing train operators or establishing regional companies also has lock-in effects on some HSR passengers. These effects lead to higher fares, which harm consumer surplus, but it may not necessarily improve the profits of the entire HSR industry. In general, maintaining the VI or implementing the complete VS (including simple VS and introducing train operators under VS structure) can obtain better social welfare under certain conditions, depending on the cost difference of various transport modes. According to this conclusion and the situation in China, we have proposed several directional recommendations for the future reform.