Transportation policy for high-speed rail competing with airlines

This study investigates the desirable transportation policy for a government seeking to regulate the competition between high-speed rail (HSR) and air transportation. To address this issue, we construct a game-theoretic model. A basic assumption underlying the model is that the airline maximizes its own profit whereas the HSR operator maximizes a weighted sum of profit and social welfare due to the government regulation. We assume a two-stage game in which the government sets the weight to maximize social welfare in the first stage and the HSR operator and the airline maximize their respective objective functions in the second stage. The central result from our model is that partial public regulation arises as a subgame perfect equilibrium unless the benefits to consumers from using the HSR are sufficiently large or sufficiently small compared to the benefits to consumers from using air transportation. The result provides a theoretical foundation for the public policies of joint investments by both governments and HSR operators in HSR networks in European and Asian countries. In addition, our results suggest that the optimal regulation by the government depends on the benefits for consumers using each mode of transport and the difference between the levels of benefits.