Effects of bus-based disruptive business models with limited capacity on rail monopolies: Social welfare implications

Long distance passenger transport markets are facing important changes as new entrants, e-Platform based bus services retailer (PBSR) operators, are challenging the railway incumbents applying judo economic strategies. Traditionally, European policymakers tended to favour railway services over road services in the long-haul markets, often leading the rail operators in monopolistic-alike positions. Recently, several countries deregulated their national intercity bus markets, gradually introducing intermodal competition in the sector. The competition led to important improvements in service quality, but it also had negative impacts on rail operators’ profitability, especially after PBSR operators started to work, due to their disruptive business model based on aggregative online platforms and production externalization. PBSR companies (e.g. Flixbus, BlaBlaBus) are characterized by high flexibility and low production costs, which use as advantage against the incumbents. The rail operators are instead characterized by high indivisibility, high production costs and, usually, big sizes. Losses in either revenues or market shares could easily force them into reducing services quantity or even exit the market. Our paper aims to analyse these new competitive relations in the intercity intermodal market, focusing on resulting impacts on market shares, demand satisfaction and social welfare. Since the bus operators present limited capacity due to technical feasibility (e.g. minimum headway) and the need to limit road congestion (to preserve service quality), the mobility right fulfilment is put in jeopardy. We modelled the competitive relations through game theory, excluding high speed rail from the perimeter to preserve service comparability. Profit levels and optimal social welfare are then studied through simulations. Results confirm that for increasing PBSR production capacity, railway operators tend to have fewer profits or be forced to leave the market, resulting in unsatisfied demand. Furthermore, from a social point of view, the rail monopoly seems to be, under specific circumstances, preferred to a duopoly.