Horizontal Differentiation and the survival of Train and Coach modes in medium range passenger transport, a welfare analysis comprising economies of scope and scale

Abstract

The Portuguese transport system as a whole suffers from the dominance of personal transportation, this being generally less efficient. Coaches and trains struggle to stay in the business. This model explains the markets’ performance beyond price differentials, bundling the transport modes’ appeal in one index for each. The differentiated transport cost approach accounts for product differentiation, economies of scope accruing to the consumer, and allows for economies of scale, in the form of fixed costs, to be weighted in, as well as tax policies towards motoring. It goes further by building a general welfare function that permits all factors and competition regimes to be properly compared. These are a monopoly by cars, duopolies with cars and each of the public transports, and oligopolies with public transports either competing or colluding. Simulations are carried out, and discussed in light of swings in market share and changes in welfare, with a reasonable claim to plausibility. Both public transports make the public better off by staying in the market, although the coaches’ contribution is more decisive. Trains results are weighted down by heavy fixed costs, and the far reaching coach network of destinations offers the second best service (behind that of cars). Collusion in the public transports is a price worth paying, when compared with the car monopoly emerging from bankrupt operators.