Efficiency versus market power in the rail industry

Abstract

Although an extensive literature exists that examines efficiency in rail markets, analyses that also study the market power of rail operators are scarce. We examine the effects of competition and vertical separation on efficiency and price-cost margins. In doing so we propose a two-stage procedure. Firstly, efficiency and Lerner indexes will be obtained for a sample of rail operators for the period 2000–2016. Secondly, the determinants of both indexes are jointly estimated. Results indicate that integrated incumbents not facing competition perform worst and exert the highest market power. Vertically separated and specialized in passenger services operators display the strongest improvements in efficiency levels, while integrated incumbents facing competition show the lowest market power indexes. Finally, more efficiency translates to smaller values of the Lerner index.