Economic stability in network industries

Much of the recent attention in Europe regarding the use of transport as an instrument of integration has centered upon the creation of an appropriate infrastructure as illustrated by the TENs Programmes of the European Union. There are also issues concerning the way operations and use of transport networks can contribute to greater spatial economic integration. The focus of recent policies has been the liberalization of transport markets and the greater involvement of the private sector in providing actual transport services. There are theoretical grounds for suggesting this can enhance both the technical and dynamic efficiency of supply and these tend to be supported by the emerging empirical findings. However, there are difficulties with relying on market and competitive forces to provide network services. The nature of supply and demand characteristics associated with networks may not produce a stable market solution. At the extreme this can result in deficiencies in output and, under less theoretically rigid conditions, can lead to volatility in supply. The result is that even where transport may have the potential to enhance spatial cohesion this potential will not be completely realized. This paper, drawing in particular on the theories of Edgeworth, looks at the underlying nature of this potential problem, examines the empirical evidence and considers appropriate policy responses.