Discussion Papers

Gernot Müller

Delineation of rail transport markets – Economic principles and implementation in regulatory practice

No. 348 / November 2010 


In order to recover total cost through rail access charges, rail infrastructure managers are permitted to levy mark-ups on "the cost that is directly incurred as a result of operating the train service". These mark-ups can be differentiated with respect to both the railway services long distance passenger transport, short distance passenger transport and freight transport, and market segments. Currently, the German Federal Network Agency makes observations about the determination of market segments in the railway sector. Therefore, the discussion paper pursues the target to draw conclusions with regard to the definition of rail transport markets, and to assess the adequateness of demand-related cost mark-ups.

Considering findings of economic transport research, rail transport services, and thus the object and distance of a service, should serve as a first basis for a factual delineation of rail markets. A further subdivision in rail markets or market segments is to be done by customer groups and their affinities, the sort and quantities of goods in transition, the types of train, the regularity of train service, as well as the distinction in national, international and transit service. Spatial market definition rests upon routes but also upon regions and countries. A temporal market definition using peak and off-peak times is possible for rail passenger transport.

In most cases, rail usage fees charged by German rail infrastructure managers differentiate with respect to transport services, railway lines or line categories, or certain technical features of trains and cars, e.g. axle load, exceedings of loading gauge and weight, and velocity. Differentiation of charges with respect to block or single wagon load trains, different kinds of rail cars, other technical features and the type of cargo is as unusual as segmentation due to the characteristics and affinities of customers. Peak-load-pricing does not take place.

To calculate cost mark-ups which are differentiated with respect to transport services and market segments, quantity and value related reference values can be applied. However, we prefer mark-ups to be set according to the inverse ratio of the direct price elasticity of demand for rail infrastructure, i.e. the Ramsey price rule. Due to default of proper data and econometric studies, we use direct price elasticities of demand for rail transport services instead. The price elasticity for short distance passenger rail transport is -0.5 on average, whereas the elasticity is about -0.9 for long distance passenger transport and freight transport services. Accordingly, mark-ups derived for the calculation of charges for the use of rail infrastructure dedicated to short distance passenger services ought to be around twice as much as for the other rail transport services. Indeed, elasticity estimates for rail transport services cannot be transferred to the rail infrastructure sector without considerable reservations. To mention just a few caveats, we point to the variance of elasticity estimates, the lack of information about the shares of rail infrastructure charges in the total costs of providing distinct rail transport services, as well as the impact of subsidies on the elasticity of demand for short distance passenger rail transport services. Full version only available in German language.

Discussion Paper is available for download.

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