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The Efficiency Impact of Open Access Competition in Rail Markets

The Case of Domestic Passenger Services in Europe

On-track competition in passenger services has traditionally been limited in European railways,
with private operators offering marginal services in selected corridors in the UK, Sweden and
Germany only. In recent years, a larger scale and more stable wave of open access market entry
has occurred in Austria, the Czech Republic and Italy, where open access operators have gained
market shares of 20-30% in long-distance corridors.

Economic theory suggests that competition can result in productive efficiencies, although theories
of competition are potentially outweighed by market characteristics which make monopoly a more
efficient market structure when applied to the rail sector. The contestability of rail markets is
further hampered by the presence of several barriers to entry as well as expansion.

The literature on the efficiency effect of rail policy changes is vast, but the focus to date has been on
industry structure and competitive tendering, with non-conclusive results highlighting the
importance of tailoring rail policies to the specific characteristics of each network. Studies have not
yet attempted to measure the industry efficiency impact of passenger open access operations,
neither specifically nor systematically – which is the goal of this paper.

Using a difference-in-difference estimator, we find that on-track competition has not, to date, led to
major efficiency improvements across the rail systems affected – despite claims that new entrants
have lower unit costs compared to incumbents. In the early days of market opening when
guarantees of non-discriminatory access have not yet been fully established, on-track competition
may be resulting in higher costs than in countries with monopoly passenger services.

These results are based on a short timeframe and will need to be tested over a longer period,
recognising that competition is a process with no instantaneous effects. An early assessment of
market opening policies is crucial to inform future regulatory decisions, at a time of budgetary
constraints, forthcoming European reforms under the Fourth Railway Package and growing
interest in market entry by new operators.