| Abstract: | Using the concept of generalised costs to reflect quality in rail services, we 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 we 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) we 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 our analysis again suggests poor welfare outcomes. The implication that can be drawn from our analysis is that a regulator of a privatised rail system faces some severe problems if she is to attain the appropriate welfare targets. |
