Entry and Competition in Freight Transport: The Case of a Prospective Transalpine Rail Link Between France and Italy

The Alps have long posed challenges to European transport infrastructure planners. Overcoming this immense bottleneck is only possible via arduous travels across high-altitude Alpine passes or through road and rail tunnels that require large efforts to be built and are expensive to maintain. We analyze the expected effects of building a transalpine rail tunnel between Lyon and Turin on i) the market shares of the established and the new suppliers, and ii) consumer surplus. The prospective project consists of a 53km rail tunnel providing freight shippers with a new alpine path. We calibrate an equilibrium model where freight shippers choose a mode and alpine path to ship goods from a given origin to a given destination. Freight carriers strategically set prices for the differentiated products they supply. Deriving the market equilibrium, we simulate the entry of a quality-improved product and test its competitive viability. The prospective alpine path proves both competitive and welfare-enhancing on the regional market, loses its competitive edge on the wider North-South market, and leads to a modal shift on the West-East market. We find limited substitutability between freight transport products on a North-South transit axis. On the Ile-de-France-Lombardia market, the shippers' decision remains largely based on the mode choice. The new high-quality rail alternative attracts new demand but does not succeed in lowering road demand. When we shorten this axis to the regional market between Lyon and Turin, both a modal shift and an increase in demand for shipping occur, securing exactly the same variations in OG market share and in consumer surplus. In contrast to the North-South axis, the West-East transit market appears a better candidate for modal-shift. Between Spain and Lombardia, the new rail link appears attractive enough for shippers to switch modes. Global traffic does not increase after the introduction of the new link, suggesting higher volatility of shippers' preferences across products on this transit axis. Should European rail integration be fostered, the new transalpine link between Lyon and Turin could play a complementary part among other urgent projects. In this respect, it would be of interest to compare the respective impacts on the West-East transit axis of the Lyon-Turin Transalpine and the Perpignan-Figueras Transpyrenees between France and Spain. Based on the analysis, the construction of a new high quality infrastructure may only be one tool out of a global modal shift-oriented policy toolbox. For the French-Italian Alpine corridor, more direct and committed intervention based on a variety of policy measures as observed in Switzerland may open a more fruitful path to the political goal of increasing modal shift towards rail.

Prady, Delphine and Hannes Ullrich (2010), Entry and Competition in Freight Transport: The Case of a Prospective Transalpine Rail Link Between France and Italy, ZEW Discussion Paper No. 10-010, Mannheim.