Toc 'N' Roll: Bargaining, Service Quality and Specificity in the UK Railway Network

36 Pages Posted: 17 Feb 2009

See all articles by Gianni De Fraja

Gianni De Fraja

University of Nottingham; Universita' di Roma; Centre for Economic Policy Research (CEPR)

Emanuela Michetti

University of Siena - Faculty of Economics

Piercarlo Zanchettin

University of Leicester

Date Written: December 2008

Abstract

The paper studies the regulatory design in a industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC's incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may indeed be preferable from the point of view of welfare.

Keywords: Incomplete contracts, Network regulation, Railways, Relation specific investment

JEL Classification: D2, L1, L5, L92

Suggested Citation

De Fraja, Gianni and Michetti, Emanuela and Zanchettin, Piercarlo, Toc 'N' Roll: Bargaining, Service Quality and Specificity in the UK Railway Network (December 2008). CEPR Discussion Paper No. DP7088, Available at SSRN: https://ssrn.com/abstract=1344667

Gianni De Fraja (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Universita' di Roma ( email )

Dipartimento SEFEMEQ
Via Columbia n.2
Rome, Rome 00133
Italy

HOME PAGE: http://www.economia.uniroma2.it/docenti

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Emanuela Michetti

University of Siena - Faculty of Economics ( email )

Piazza San Francesco, 7
I-53100 Siena, 53100
Italy

Piercarlo Zanchettin

University of Leicester ( email )

Department of Economics
Leicester, LE1 7RH
United Kingdom

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