Can competition for and in the market co-exist in terms of delivering cost efficient services? Evidence from open access train operators and their franchised counterparts in Britain

This paper aims to inform an important policy debate in Europe on how best to open up passenger rail markets to increased competition: and specifically, whether to allow open access train operators alongside franchised (tendered) operators. The paper utilises new British data to analyse the cost side of this debate. Our data is unique in that we have cost data by route level for both the incumbent (corresponding to British franchises) and the open access operators, as opposed to only having cost data on the incumbent at the network level as in other countries. The open access operators are found to have comparable unit costs to franchised operators. This is unexpected considering the significant returns to density that benefit the larger franchised operators. This is subsequently found to be due to lower input prices and an ‘open access business model’ effect that outweigh any density disadvantages. Overall we find that there are negligible cost disadvantages of allowing open access operators to compete with franchised intercity operators.