Price Competition in the Intercity Passenger Transport Market: A Simulation Model

Transcription

1 OECD Technical Workshop on the Economics of Regulation Paris 7 December 2011 Price Competition in the Intercity Passenger Transport Market: A Simulation Model Marc Ivaldi JOINT WITH CATHERINE VIBES-MULLER 2 1

2 Outline of the presentation Context: Liberalization processes in both the air and railways sectors Obective: The analysis of inter- and intra-modal competition in the transport industry o o Strategic choices: prices, product design Regulation Example and data Econometric model: too many data! Simulation: cheap solution to get a sense of solutions Model and methodology Results Concluding remarks 3 The context Liberalization in the airline industry: In Europe starts in 1987 to end up in Airlines are free to set prices, capacities and have free access to the market Deregulation in the railways industry: 1991 with Directive 91/440. Obectives: Increase railroads market shares, reduce subsidies, liberalize access to infrastructure Consequences: Air transport: Hub and spokes network, entry of LCAs on point to point Rail: High Speed Train technology Fierce new inter-modal competition and strong intra-model competition 4 2

3 Inter- and intramodal competition Airlines and train operators are facing separately intramodal competition Technical and structural changes: real and fierce intermodal competition between airlines and train operators Another important competitor: private car, giving full scope for the driver to travel at any time 5 Obective Analyze inter- and intramodal competition in the transport industry: o Consumers choose a transport mode and an operator to travel on a given city-pair o Operators strategically decide on prices for the type of services they provide, and on product design Passengers have different valuations for the service offered by an operator used strategically by competitors to avoid fierce price competition different services for different segments o Regulation 6 3

4 Contribution This differentiated-product market, empirical analysis: o o Number of products on the market? In mode choice analysis usually small Disaggregated model: important data collection we present a methodology avoiding this difficult task In our setting we model demand and supply in order to recover equilibrium outcomes: essential aspect of competition usually left aside 7 Example and data The link: Cologne-Berlin, 600 km The actors: The National rail operator: DB AG 3 LCAs (DBA, HLX and GW) and the flag carrier Lufthansa Private car The data: 2003 data for traffic, prices, services characteristics. 8 4

5 Traffic Modal Shares Alternatives Shares Busin ess Leisu re Prices Euros Busine ss Leisu re Spee d Km/ Min Frequen cy Trips/Da y Capacit y Seats/T rip Marginal Costs* Busin ess Leisur e Rail Air Car D B D B A H L X G W L H C ar Na Na Na Na Na Infinity 5 Na na 9 Example and data (cont.) Motivation: o C-B: 600km significant share of total long distance traffic in Germany o Geography diversity of travelers on the link (business, leisure ). Differentiation in transport services: several modes and several airlines o Intra- and intermodal competition: o Between LCAs o Between LCAs and LH (mode) o Between LCAs and DB (prices) o Between LH and DB (LCA vs LH LH prices) o Entry and exit of Connex on the link 10 5

6 The Model: Demand side Two separate markets: business and leisure (different requirements concerning schedules and prices for ex.) Discrete choice model of consumer behavior. Travellers choose a mode and a specific service Specification for an empirical analysis: nested logit model Outside alternative: no trip (!!) 11 Consumer s choice tree RAIL AIR CAR OG Do not travel Choose another good DB DBA HLX GW LH CAR 12 6

7 The Model: Demand side (cont.) Alternatives are characterized quality parameter price p Frequency, time, reliability Unobservable quality Utility function U V i i Mean utility level V hp, Tradeoff quality-price (net value of time) h=sensitivity of utility to price (rate of change between quality and price) 13 The Model: Demand side (cont.) Nested logit model: products within the same group are closer substitutes: i ig 1 i, i 1,..., N σ= degree of intragroup correlation i has the standard extreme value distribution Effect of differentiation on optimization error 14 7

8 The Model: Demand side (cont.) Consumer chooses the utility-maximizing alternative: U U, '. i i Berry (1994): mean utility level function of observed market shares (replaced measures of choice probabilities) q k s s0 hp s / g ln ln ln q The share of mode depend of its relative net utility and its level of differentiation 15 The Model: Demand side (cont.) Own and cross-price elasticities dq p 1, k hp s s / g g dp q 1 1 dq p hp s if k k g, g k, k k k dpk q dq p s hp s if k,k g k k/ g, k k k 1 dpk q 1 sk 16 8

9 The Model: Supply side Each firm provides one product «Private car» offered by a firm competing with the other alternatives Firms compete in prices (Bertrand) p c q K FOC p c 1 h 1s 1 s / g 17 The Model: Nash Equilibrium Solution obtained by solving the system of equations: s s0 hp s / g ln ln ln p c 1 h 1s 1 s / g 18 9

10 Calibration: Methodology Fewer data are needed: market shares, prices, characteristics, some marginal costs Parameters to be recovered: h, σ, ψ i, and marginal costs. System of equations: Demand, nested logit: o Market shares equations o Own price elasticities expressions Supply side, profit maximizing firms: o Markup expression 19 Calibration results The system is solved numerically (Gauss) Equilibrium outcomes are recovered Quality index weighted sum of alternatives attributes Simulations can be run 20 10

11 Calibration: Assumptions 2 separate markets: business+leisure Share of the outside alternative=15, 30 or 60 of the population of potential travelers (=market size) 21 Prices, marginal costs p c p 1 Step 1 Prices, market shares Prices, market shares Transport service characteristics 1 hp s s / g 1 1 h, s s0 hp s g ln ln ln f transport service characteristics Consumers valuations for quality components Step 2 Step

12 Results: Equilibrium BUSINESS LEISURE Share of the outside alternative Rail DB DBA Market HLX Air Shares GW LH Car Car Outside alternative Marginal Utility of Income Coeff. of Within Group Correlation Rail DB DBA Own Price HLX Air Elasticities GW LH Car Car Consumer Surplus Quality index BUSINESS LEISURE Share of the outside alternative Rail DB DBA Quality, HLX Air Mode Ranking GW LH Car Car DB Dummy LCA Dummy Quality LH Dummy characteristics Speed / Frequency / Capacity

13 Monetary valuation Speed: of 1 km per minute For Business travellers: price by euros For Leisure travelers: price by 30.3 euros Frequency: of 1 unit For Business travelers: DB price by 0.4 euros, DBA prices by 1.4 euros,, LH prices by 1.1 euros For Leisure travelers: similar effects B travelers indifferent in DB frequency improvement but not in airlines frequency improvement 25 Simulation: Entry of LCAs in 2001 Share of the outside alternative LEISURE Changes: values, Value Change Value Change Value Change Rail DB DBA Prices Air HLX GW LH Car Car Rail DB DBA HLX Market Air GW Shares LH Car Car Outside alternative Consumer Surplus

14 Simulation: Low Cost Train Entry BUSINESS LEISURE Share of the outside alternative Changes: values, Value Change Change Value Rail DB New Train DBA Prices HLX Air GW LH Car Car DB Market Shares, Rail Air New Train DBA HLX GW LH Car Car Outside alternative Consumer Surplus Simulation: Kerosene tax BUSINESS LEISURE Share of the outside alternative Changes: values, Value Change Value Change Change Value Value Change Value Change Value Change Rail DB DBA HLX Prices Air GW LH Car Car Rail DB DBA HLX Air Market GW Shares LH Car Car Outside alternative Consumer Surplus

15 Conclusions Different competition framework for the two markets o o Business» Less sensitive to prices» More sensitive to services characteristics» More sensitive to what happens in the air sector Leisure» More sensitive to prices» Less sensitive to services characteristics» More sensitive to what happens in rail transport Possibility to induce traffic mainly on the leisure market Intermodal competition does not leave too much room to intramodal competition 29 15