Regulated versus negotiated access pricing in vertically separated railway systems

This paper studies access pricing under three regimes: regulated access (VSR), negotiated access with discriminatory pricing (VSD) and negotiated access with non-discriminatory pricing (VSN). We compare each regime along three metrics: network quality, consumer surplus, and social welfare. To do so, we use a three-stage game, in which the regulator can commit to the access tariff under VSR and the network firm and the transport operators need to bargain over the access tariff under VSD and VSN. Each approach is second best, resulting in equilibrium qualities and quantities that are less than first-best levels, and the comparison between regulated and negoitated access is ambiguous. However, under a wide range of circumstances VSD and VSN result in greater investment to upgrade network quality than VSR. Computational analysis reveals that if the bargaining power of the network firm under negotiated access is sufficiently strong, VSD tends to result in higher social welfare than VSR. However, VSR often results in higher consumer surplus.