Privatisation and the quality of rail services

Using the concept of generalised costs to reflect quality of rail services, the authors consider the level of provision and quality of these services in the various forms they may take in a privatised environment within a model where they assume linear and separable demand and cost functions for analytical simplicity. Using the Pareto-efficient output and quality outcomes under a fully integrated system for reference (as well as those for a fully integrated profit-maximising monopolist) the authors show that if either bilateral monopoly or complementary monopoly emerge as a market structure the output of train services and their quality will generally fall. In the case of the emergence of both bilateral monopoly and complementary monopoly the analysis again suggests poor welfare outcomes. The implication that can be drawn from the present analysis is that a regulator of a privatised rail system faces some severe problem if she is to attain the appropriate welfare targets.