A Difference-In-Difference Approach to Estimate the Price Effect of Market Entry in High-Speed Rail

Abstract

The effect of competition on prices in the passenger transport sector can be difficult to estimate because of many influencing factors such as state regulation, demand, seasonality, and reactions of indirect competitors. A case of great interest in the rail sector is Italy, where on-track competition in the high-speed segment has been in place for nearly ten years. The paper aims at answering the question whether—and how much—incumbent’s prices are affected when competition starts on a route previously in monopoly. The case is the start of operations on the Turin–Milan–Venice route, where Italo entered in May 2018. Adopting a difference-in-difference approach, we check if Trenitalia changed the price strategy on the route before and after the entry, with respect to two control groups. The addition of placebo tests allows us to understand the ranges of significance of the results and to estimate the noise level of the estimates. Our findings suggest that the start of competition led to lower prices in the short-medium period. In the specific case, the Milano–Venezia route saw Trenitalia’s prices reduced by 21–26% (±2–5%) in a time span of 84–140 days after Italo’s entry and for advanced bookings from 2 to 10 days. Last-day prices remain unchanged, while early bookings are reduced by just 9%. This price reduction does not remain stable in the longer term, when other effects add up and blur the effect of the entry. Nevertheless, we keep observing a smaller, ∼15%, but still negative prices change.

Goodbye monopoly: The effect of open access passenger rail competition on price and frequency in France on the high-speed paris-Lyon line

“…In other cases, the effect is more complex. In a recent detailed study, Beria et al (2022) showed that price on the Turin-Venice route decreased by -21% to -26% after the entry of Italo in May 2018. However, more than six months afterwards, the reduction was around 15%.…”

“…The group affected by the change is called the "treatment group" then the other is the "comparison group". The method is especially well adapted to our case study and has been already applied to railway analysis by Beria et al (2022). The authors compared routes in Italy with competition to routes without competition to better assess the effect of competition on price.…”

“…According to Beria et al (2022), we should obtain the following result in figure 4 where two situations are possible. The effect of competition is "sudden" and the incumbent has to quickly reduce its prices or the effect is "delayed" because the incumbent anticipates or is subject to considerable inertia.…”

“…The purpose of this paper is to draw up the first overview of the market by considering prices and frequencies after one year of competition. To our knowledge, no study has been yet been carried out on the new French case and it appears pertinent to compare this situation to other markets already opened to competition, like in Italy (Bergantino et al, 2015;Beria et al, 2016;Desmaris and Croccolo, 2018;Beria et al, 2019;Beria et al, 2022), the Czech Republic (Tomes et al, 2016;Tomes et al, 2018;Jandova and Paleta, 2019;Fitzova et al, 2021;Tomes, 2022), Sweden (Alexandersson and Rigas, 2013;Froidh and Nelldal, 2015;Vigren, 2017), the UK (Temple, 2015) and, more recently, Spain (Montero and Melero, 2022). There are several reasons for carrying out a specific analysis of the French case in the literature.…”

“…Laroche (2022a) showed that the long-distance market was affected during the pandemic with a falls of -5% in frequency and -16% in average price for long distance train services between September 2019 and November 2021. To assess the specific effect of competition, we use a Difference in Difference approach in a way similar to Beria et al (2022). The route chosen for the comparison group is the Paris -Bordeaux High Speed Line.…”