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Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network

Author

Listed:
  • Gianni De Fraja
  • Emanuela Michetti
  • Piercarlo Zanchettin

Abstract

The paper studies the regulatory design in an industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC’s incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may in fact be preferable from a welfare viewpoint.

Suggested Citation

  • Gianni De Fraja & Emanuela Michetti & Piercarlo Zanchettin, 2009. "Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network," Discussion Papers in Economics 09/7, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:09/7
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp09-7.pdf
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    References listed on IDEAS

    as
    1. Gianni De Fraja & Alberto Iozzi, 2008. "The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 1011-1040, December.
    2. Yvrande-Billon, Anne & Menard, Claude, 2005. "Institutional constraints and organizational changes: the case of the British rail reform," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 675-699, April.
    3. Newbery, David M., 1997. "Privatisation and liberalisation of network utilities," European Economic Review, Elsevier, vol. 41(3-5), pages 357-383, April.
    4. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    5. Luisa Affuso & David Newbery, 2002. "The Impact of Structural and Contractual Arrangements on a Vertically Separated Railway," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 83-92.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Bordignon, Stephen & Littlechild, Stephen, 2012. "The Hunter Valley access undertaking: Elements of a negotiated settlement," Transport Policy, Elsevier, vol. 24(C), pages 179-187.

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    More about this item

    Keywords

    Network regulation; Railways; Incomplete contracts; Relation specific investment;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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