Effects of introducing low-cost high-speed rail on air-rail competition: Modelling and numerical analysis for Paris-Marseille

Given the trend of railway liberalization in Europe and Asia, we explore the effects of introducing low-cost high-speed rail as an answer to the railway reform on air-rail competition. In particular, by proposing a vertically differentiated model, we first derive the optimal pricing policies as well as the corresponding profits and market shares for low-cost high-speed rail (LCR), full-service high-speed rail (FSR) and air transport (Air). We do so for two types of LCR entrants, namely the incumbent owned entrant (to the FSR company) and the independently owned entrants. For both situations, we prove analytically that introducing LCR leads to reduced FSR and Air fares as well as to reduced Air traffic. The fare and traffic reductions increase with the passenger's time value and with the LCR travel time, while they decrease with the Air unit seat cost. Moreover, all LCR effects are stronger for an independently operated LCR. We apply our model to the Paris-Marseille route, based on data collected from publicly available sources. It is found that introducing an independently owned (incumbent owned) LCR on this route leads to 39% (33%) less air traffic, 20% (14%) less FSR traffic and a 37% (29%) increase in total rail traffic. Furthermore, this comes with increases of 2% (8%) in combined railway profit and 6% (5%) in total social welfare. These results support the decision of French policy makers to have LCR and FSR operated by the same company, as it comes with much higher combined railway profits and almost the same welfare increase as independently owned LCR. Further sensitivity analyses suggest that most LCR passengers would otherwise have traveled by FSR or Air, although LCR also attracts new passengers. In addition, offering a low-cost alternative is more effective if passengers value time more highly. Implications in terms of methodology and industry are provided.