Abstract

http://ssrn.com/abstract=745164
 
 

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The Functioning of Inter-modal Competition in the Transportation Market: Evidence from the Entry of Low-cost Airlines in Germany


Guido Friebel


Goethe University Frankfurt; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Marko Niffka


Deutsche Bahn

May 2005


Abstract:     
We investigate the entry of low-cost airlines (LCAs) in the German passenger transportation market. Using market research data and unique turnover and pricing information, we document that substitution rates between LCA and the incumbent rail operator Deutsche Bahn (DB) are substantial. As the competitive pressure of LCAs is surprisingly effective, both air and rail transport networks are forced to reconsider their pricing strategy. We document the price reactions of the two network providers. Lufthansa reacted by a drastic cut of all prices for all intra-German origin and destinations (O&Ds). We argue that the physical conditions of railroads make it harder for them to react. As railroads are an open system, changing the price system on one O&D has substantial opportunity costs on other O&Ds in the same network. This imposes constraints on price strategies which neither LCA nor the incumbent air network provider have to satisfy to the same extent. While this reduces the capability to react for a rail network provider, reactions can nonetheless be swift and efficient, as we document for some O&Ds. Our case shows the relevance of modern industrial organization and incentive theory in better understanding the interaction of different modes on the same market. It also has interesting implications for regulation of the European long-haul passenger market.

Number of Pages in PDF File: 30

Keywords: railroads, price strategies, incentive constraints, regulation

JEL Classification: L11, L92, L93

working papers series


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Date posted: June 21, 2005  

Suggested Citation

Friebel, Guido and Niffka, Marko, The Functioning of Inter-modal Competition in the Transportation Market: Evidence from the Entry of Low-cost Airlines in Germany (May 2005). Available at SSRN: http://ssrn.com/abstract=745164 or http://dx.doi.org/10.2139/ssrn.745164

Contact Information

Guido Friebel (Contact Author)
Goethe University Frankfurt ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Marko Niffka
Deutsche Bahn ( email )
Tannenweg 57
Meckenheim, 533340
Germany
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