Transcript Competition vs Coordination: The analytics of open access

COMPETITION vs. COORDINATION:
THE ANALYTICS OF OPEN ACCESS WITH
ILLUSTRATIONS FROM RAILROADS
José A. Gomez-Ibañez
Annual Regulatory Conference of the Australian
Competition and Consumer Commission,
Surfers’ Paradise, Queensland July 29, 2010
Open Access in Network Industries
Networks:
Services:
Traditionally Integrated
Traditionally Open
Track
Trains
Port
Ships
Wires
Elec.
Pipes
Water
Highways
Trucks etc.
Other terms:
vertically unbundled vs. vertically integrated
services-based vs. facilities-based competition
Competition-Coordination Tradeoff
(Ronald Coase, 1927)
Integration decision (make or buy)
Buy normally preferred
Make (integrate) if:
• Durable, relationship-specific assets important
• Needs too complex and uncertain to contract
Forced open access or unbundling:
competition-coordination tradeoff
Outline
• Simple Analytic Model of Tradeoff
• Coordination costs important
• The Tradeoff in Railroads
• Published empirical estimates
• Case studies of coordination costs
– Australia: Complexity of the interface
– Europe: Network capacity and user diversity
– North America: Reciprocity and selectivity
• Applications
Competition-Coordination Tradeoff
(Oliver Williamson, 1968)
Price
P1
A
C
MC2
P2
B
MC1
Demand curve
Q1
Q2
Quantity
Before Open Access
Price
P1
A
B
MC1
Demand curve
Q1
Quantity
Before Open Access
A+B = profits to producer
Price
P1
A
B
MC1
Demand curve
Q1
Quantity
After Open Access
Price
P1
A
C
MC2
P2
B
MC1
Demand curve
Q1
Q2
Quantity
Net Social Gain or Loss From Access
B = coordination loss to producers
C= competitive gain to consumers
Price
P1
A
C
MC2
P2
B
MC1
Demand curve
Q1
Q2
Quantity
Transfers from Producers to Consumers
B = coordination loss to producers
C= competitive gain to consumers
A= transfer from producers to consumers
Price
P1
A
C
MC2
P2
B
MC1
Demand curve
Q1
Q2
Quantity
Complications
• Continuing need for tariff regulation
» “wholesale” (access) rather than retail tariffs
• Divestiture or ring fencing
• Access as a means to privatization
• Dynamic issues
» Investment
» Innovation and technological change
The Importance of Coordination Losses
Railroads: Published Estimates
• Competitive gains
• US freight railroads: 10% to 20% tariff reduction if
second carrier
• Passenger railroads: no estimates because subsidies
• Coordination losses
• US freight railroads: 5% to 40% increase in costs
• European railroads: mixed results
Australia: Interface Complexity
• Access the norm beginning 1995
• Most track infrastructure still government owned
• Most train operators now private
• Pilbara iron ore railroads (integrated & private)
• BHP and Rio Tinto
• Smaller miners want access
• Queensland coal railroads (integrated & government)
• Miners oppose privatization as vertically integrated
railroad
Pilbara and Queensland
Pilbara and Queensland
Heavy haul railroads
• Heavy axle weights
• 30 to 40 tons vs. 20 to 25 tons
• Wheel-rail interface
• Part of complex supply chain
• Mines, stockpiles, ports, ships in addition to trains and
track
• Dispatching and capacity investment
Pilbara and Queensland
Europe: Network Capacity and User Diversity
• EC requirements
• Open access for many train services beginning 1991
• Separation of infrastructure from train operations
• Continental Europe: few lessons
• Relatively few added services
• Infrastructure companies government owned and many
heavily subsidized
Britain
• British Rail restructuring and privatization (1994-97)
• One infrastructure company (Railtrack), 25 passenger
train companies, etc.
• System of access charges and penalties
• Low fee per added train encourages more trains
• Industry regulator orders Railtrack and train operating
companies to negotiate over capacity improvements
• Railtrack bankruptcy (2000)
• Hatfield accident
• West Coast Main Line upgrade
Hatfield Accident
West Coast Main Line
North America: Reciprocity and Selectivity
(171,000 U.S. freight track miles)
• Voluntary exchanges of access
• Urban: terminal railroads (≈ 5,000 track miles)
• Mainline: e.g. directional running (≈ 24,000 miles)
• Government-compelled exchanges
• Amtrak and VIA intercity passenger services (1970s)
• Conditions for US mergers (1990s, protect 2-to-1
shippers, ≈ 6,000 track miles)
• “Inter-switching” in Canada (30 kilometer limit)
• Powder River Basin in Wyoming
U.S. and Canadian Frieght Railroads:
Only seven class 1 carriers
North America
• Amtrak and the freight railroads
• No reciprocity
• Belt Railroad of Chicago (BRC)
• Too many owners
• Canadian inter-switching
• Leveraging the first 30 kilometers
• Powder River Basin
• Coordination costs despite reciprocity and leverage
Amtrak: Little Reciprocity, Too Long
Route miles: 22,000
Own track: ~ 700
Belt Railway Company
of Chicago: Six Owners
Canadian Inter-switching: Reciprocal, Short
Powder River Basin Joint Line:
Reciprocal, Short
Conclusions
• Access a competition-coordination tradeoff
• Often significant competition already
• A little lost coordination offsets a fair amount of
increased competition
• Coordination losses higher
•
•
•
•
•
More complex and sensitive the provider-user interface
Network is close to capacity
Access seekers have diverse needs
Little reciprocity in access rights
Rights are broad rather than selective
Applications to Other Industries
• Road vs. rail
• Vehicle-highway interface more forgiving
• Competitive benefits of highway access greater
• Telecommunications
• “Short” access often important (poles and towers)
• Voice telephony vs. broadband
– Competitive benefit has declined significantly with both
– Broadband greater pressure for capacity
– Broadband interface more complex and changing