COMPETITION vs. COORDINATION: THE ANALYTICS OF OPEN ACCESS WITH ILLUSTRATIONS FROM RAILROADS

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

Traditionally Integrated Traditionally Open

Networks: Track Wires Pipes Port HighwaysServices: Trains Elec. Water Ships Trucks etc.

Other terms:vertically unbundled vs. vertically integratedservices-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

Demand curve

Competition-Coordination Tradeoff(Oliver Williamson, 1968)

Q1 Q2 Quantity

MC2

MC1

Price

P1

P2A

B

C

Demand curve

Before Open Access

Q1 Quantity

MC1

Price

P1

A

B

Demand curve

Before Open AccessA+B = profits to producer

Q1 Quantity

MC1

Price

P1

A

B

Demand curve

After Open Access

Q1 Q2 Quantity

MC2

MC1

Price

P1

P2A

B

C

Demand curve

Net Social Gain or Loss From AccessB = coordination loss to producersC= competitive gain to consumers

Q1 Q2 Quantity

MC2

MC1

Price

P1

P2A

B

C

Demand curve

Q1 Q2 Quantity

MC2

MC1

Price

P1

P2A

B

C

Transfers from Producers to ConsumersB = coordination loss to producersC= competitive gain to consumers

A= transfer from producers to consumers

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 Companyof 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