Economic trade-offs in rail transport

In this study, we derive economic trade-offs between the vertical organisation of rail transport and efficiency. For this purpose, we reviewed the academic and industry literature, screened available market statistics, assessed the experience from exemplary European countries and other network industries, and carried out interviews with industry experts.

We provide a brief summary of the report here. A link to the full version can be found below.

Policy insights

Railway policy across Europe shares common long-term goals

A common long-term goal of railway policy is to provide an efficient, high-quality service for end-customers connected with the best end-user experience regarding availability, speed, punctuality, and service.

Further common goals are the increase of the modal share of rail in the transportation of freight and passengers, and keeping costs as low as possible.

There is no one single policy solution

Countries differ with respect to their railway networks, political and economic systems, topography, population density or urbanisation factors. This is why there are diverse national railway policies among European countries. As a result, different forms of horizontal and vertical market organisation can reach the same long-term goals.

This conclusion is supported by efficiency score estimates from the economic literature (details in the full report). Spain, Sweden and Estonia reached a high average efficiency score with a vertically separated market model.

Germany, France and Latvia reached a comparably high efficiency score with a model of organizational separation. Switzerland also attained a top efficiency score based on a fully integrated model.

Complex railway system requires a holistic approach – Systemgedanke

The rail system is caught between the conflicting priorities of long-term investment and short-term end-customer needs. In addition, there are interdependencies between the different business segments and the interaction of many stakeholders.

Given this complex situation, there is a need for a holistic view of the system that takes all the diverse aspects into account and internalises externalities and conflicts. In particular, the fact that in Germany the same railway network is used by freight, regional and long-distance passenger trains poses a huge coordination challenge.

Economic theory predicts that vertical integration can be a partial solution to address possible coordination failures and contracting problems.

Take aways on economic trade-offs

• Infrastructure managers and rail operators have different incentives
• High train density favours vertical integration
• Shared infrastructure favours vertical integration
• Vertical separation may harm investment incentives
• Different vertical systems require different regulation
• Infrastructure requires some form of regulation and government funding

Pitfalls in policy debate

Political debate on the topic of railways is often on the search for quick and easy solutions, which results in severe oversimplifications. Ignoring more balanced and nuanced considerations can lead to mistakes.

Check out the report below to find a detailed description of pitfalls in the current policy debate in Germany.

Contact

For more insights or any questions, please contact the E.CA’s experts.

• Pauline Affeldt
• Hans W. Friederiszick
• Elżbieta Głowicka

Link to executive summary
Link to the full report

On the 5th of July our director Hans W. Friederiszick chaired a special policy session on this year’s CRESSE – Competition and Regulation European Summer School and Conference.

This session covered current developments and challenges relating to the topic “Ecosystem Competition: Access Charges, Fairness, Interoperrability”.

It was a great exchange with the internationally recognised experts and panelists Marc Bourreau (Télécom Paris), Giuseppe Colangelo (Università degli Studi della Basilicata), Jacques Cremer (Toulouse School of Economics), Eliana Garces (Analysis Group), Simon Loertscher (University of Melbourne) and Keith Waehrer (Secretariat Economists).

CRESSE is a network of academics and professionals, practicing in competition or regulatory authorities, consultancies and legal practices, with an interest in competition policy and sectoral regulation. It was initiated by Prof. Yannis Katsoulacos in 2005. E.CA has the honour of being a long-standing partner and we are very grateful for this cooperation.

The European Commission has published the report “Exploring Aspects of the State of Competition in the EU” on June 24 2024.

The report was prepared by a consortium of firms led by Lear and comprising E.CA Economics, Fideres, Prometeia, the University of East Anglia, and Verian. Our report has contributed to the Commission’s own report entitled “Protecting Competition in a Changing World”, also published on June 24 2024.

The report contains five chapters

Chapter 1: Widened gap between market leaders and followers – by Lear and Prometeia

The first chapter describes the available evidence on how competition seems to have weakened across markets in the EU over the past few decades: industry concentration and markups have increased, while the gap between market leaders and followers has widened and business dynamism seems to have declined. Against this background, this report investigates four other important aspects of the state of competition in the EU.

Chapter 2: Impact of industry concentration on prices – by the University of East Anglia and Fideres

The second chapter explores the role played by market or industry concentration in determining market outcomes in specific industries. It provides evidence that higher concentration is generally associated with higher prices through price-concentration studies concerning six sectors of economic activity: mobile telecom, airlines, beer, mortgages, modern consumer retail and cement.

For mobile telecoms and airlines, the report includes original empirical analyses that shows causal effect of market concentration on prices and other outcomes.

Chapter 3: Development of the profits of global superstars – by E.CA Economics

The third chapter provides an analysis of the evolution of “Global Superstars” – the most profitable of the world’s largest firms. It finds that their profit rates have increased significantly over the last 25 years, and that the distribution of profits has become more skewed.

This section also investigates why these profits are not competed away, focusing particularly on certain sectors of economic activity (the IT, pharma and consumer goods sectors) where Global Superstars are protected by barriers to entry.

Chapter 4: Interplay between domestic competition and export competitiveness – by Lear

The fourth chapter informs the debate on the interplay between domestic competition and export competitiveness.

A survey of EU-based exporting firms, conducted by Verian, suggests that effective domestic competition within the Single Market (i) is an important driver of their global export competitiveness (particularly in upstream goods markets) and (ii) does not, for a majority of respondents, constrain their scale in a way which would prevent them from being successful on global export markets.

Chapter 5: Costs of non-competition – by Prometeia

The final chapter provides original estimates of the costs of non-competition to the wider economy. Relying on own estimates of markups, the report shows that effective competition brings about sizeable macro-economic benefits, positively affecting investment, employment, productivity and GDP growth.

Contact

If you want to get more insights and results please contact our expert, Alexis Walckiers.

Download full report

At the beginning of June our directors Linda Gratz and Hans W. Friederiszick gave a presentation at the 2024 Hal White Antitrust Conference. This event was organised by our US partners Bates White Economic Consulting.

Our directors spoke about bargaining power in the bilateral negotiations between carriers and large Content and Application Providers (CAPs) over IP data transport fees.

In a recent legal dispute between Meta and Telekom Deutschland GmbH, Meta stopped paying fees while continuing to use a dedicated direct network connection into Telekom’s network, with both parties accusing each other of abusing a dominant position.

In this context, our company analysed the relative bargaining power of carriers and CAPs in the bilateral negotiations over fees for IP data transport.

We concluded that carriers technically cannot deny access to their network. Furthermore, large CAPs can deliberately cause congestion at interconnects into a carrier’s network, thereby temporarily deteriorating the connection quality in the network. Consequently, a significant imbalance in the relative bargaining power in favour of large CAPs can arise.

The dispute between Meta and Telekom could become a precedent for establishing whether CAPs must pay for using dedicated direct connections to carrier’s networks and contribute their share to the necessary investment into Next Generation Networks.

We thank Bates White for inviting us to speak at the conference. Thank you also to our clients for the opportunity to share our analysis and engage in such an important discussion.

E.CA Economics has won the Antitrust Writing Award. Our “EU publication on State aid: E.CA supports DG Competition with revision of Railway Guidelines” was awarded in the category “cross-border”. Congratulations to our directors Elzbieta Glowicka and Anselm Mattes and all other involved colleagues. The study was conducted by a consortium lead by E.CA and included LEAR, Sheppard Mullin, UEA and the Institute for Transport Studies at the University of Leeds.

Click here if you want to read more details about the study and the results.

The new edition of the European Competition Law by Prof Helmut Schröter, Robert Klotz, and Bernhard von Wendland was published recently.

Our director Hans W. Friederiszick and associate principal Rafael Aigner contributed the chapter “The role of economic analyses in the enforcement of European antitrust law”.

This reference work for competition law covers the entire field of antitrust and merger law with all procedural rules, enriched with commentaries and interpretations by relevant experts.

The fact that we were able to participate in this standard work is a nice proof of how much our expertise is recognised and appreciated in the industry.

The book (ISBN 978-3-8487-6325-2) can be ordered via this link.

On the 22 March 2024 the conference “Dynamics of Generative AI” will take place in Berlin. The central question that will be discussed is: What will define the future of AI ecosystems? The conference is co-hosted by the Weizenbaum-Institut and the Amsterdam Law & Technology Institute.

At the event lawyers, economists, computer scientists, and social scientists will gather their knowledge to find answers around this question.

E.CA Economics is proud that our director Elżbieta Głowicka has an active part in the discussion. She will talk about how vertical partnerships and/or integration in the GenAI value chain can facilitate competition in GenAI products.

Our director Anselm Mattes will contribute to the Noerr Competition Day on 14/15 March 2024 in Munich. The conference will cover many topical issues in competition law and practice and can be expected to offer many valuable insights!

In a plenary panel Dr Mattes will discuss with Thorsten Käseberg from the Federal Ministry of Economics and Climate Action the latest developments in German competition law, e.g.

• the new powers of the Bundeskartellamt following a sector enquiry, which were introduced with the last amendment to the German competition law (§32f)
• the newly introduced one percent presumption of harm in the case of benefit skimming (§34(4))

Also, part of the discussion will be the following potential changes to German competition law that are currently under discussion, inter alia

• changes to the notification thresholds in merger control with a focus on killer takeovers
• greater consideration of sustainability in competition law, e.g. in sustainability agreements between companies
• a stronger role for the Bundeskartellamt in consumer protection and the interplay between consumer protection and competition

We are very much looking forward to the 11^th edition of the Noerr Competition Day.

In April 2022, the British Competition and Markets Authority (CMA) published E.CA Economics’ ex post evaluation of its approach to vertical mergers. The CMA retained us to look at four recent mergers with a vertical component and evaluate whether CMA’s assessment was reasonable and correct. We also reviewed the current thinking on vertical mergers to help the CMA learn from the latest developments.

Merger cases that have been analysed

E.CA’s evaluation reviewed four CMA assessments of vertical mergers, or mergers with a
vertical component. All took place in 2017. They were:

1. the acquisition by a vertically integrated pig farming and pork processing operation,
   Tulip, of a large pig farm specialised in outdoor bred pigs, Easey;
2. the acquisition by the brewer and pub owner, Heineken, of Punch pubs;
3. the acquisition by Mastercard of the payment infrastructure provider, Vocalink; and
4. the acquisition by the UK’s largest grocery retailer, Tesco, of the UK’s largest grocery
   wholesaler, Booker.

Key findings

E.CA found that the CMA carried out largely reasonable and correct assessments of these mergers. The following key findings aim to help the CMA fine tune its practice in the future:

Business evidence is important
Vertical mergers tend to be more complex than horizontal mergers, which means that vertical harm can be more difficult to understand. We found that in all reviewed cases there was good quality evidence, that would have helped the CMA understand the purpose of the merger. The CMA could have derived useful knowledge from this evidence for its assessment of competition concerns.

Vertical mergers are rarely isolated events
In all reviewed industries other cases of vertical consolidation were taking place within a similar time frame. The CMA would have benefitted from understanding the impact of and motivation for the mergers in a wider industry context, and from taking a more dynamic approach to the counterfactual.

Updating the vertical toolkit
The CMA’s Merger Assessment Guidelines help with some vertical cases, but may not provide sufficient guidance to tackle some of the recently formulated concerns, such as softening of competition through a vertical recoupment mechanism, or potential competition concerns in a platform market setting.

Balancing the SLC test
The CMA could be more mindful of the need to balance its SLC test with both greater interest in (and rigorous testing of) efficiencies, as well as with consistent application of the ability-incentive-effect framework for the assessment of foreclosure. The CMA could also be more thorough in its assessment of entry ans expansion.

Benefits of simplicity
The CMA tended to investigate more theories of harm for longer than we considered necessary. Given that some of the most plausible theories of harm were complex and required careful assessment, the CMA would have benefitted from focusing on a smaller number of higher likelihood concerns.

Contact

For more insights or any questions, please contact the E.CA’s experts.

• Alena Kozakova
• Michael Rauber

These E.CA employees were also involved: Rafael Aigner, Bas Dessens, Vedika Hegde, Nicola Heusel, Raphael Poncet, Giulia Santosuosso.

Click here to find the full report.

New year – new promotions. We are happy to announce that E.CA Economics keeps growing and getting stronger. We start 2024 celebrating the promotion of our exceptional colleagues:

Promotion to Associate Principal: Brecht Boone, Juri Demuth, Harm van Leeuwen
Promotion to Manager: Benedikt Flügel, Jan Málek, Simon Specht
Promotion to Senior Economist: Julius Hohberg, Malte Jeschonneck, Raphaël Poncet, Giulia Santosuosso, Owen Weijie Yan

Congratulations!

This has become a nice tradition at the end of the year – already since 2008: GCR has recognised E.CA Economics, in its GCR 100 ranking, as one of the top 20 competition economics firms globally. 

E.CA is considered “highly recommended” by its clients and seen as a unique independent European competition economics firm, rooted in Germany and with offices in Brussels and London. Their description also points to our strong collaboration with our partners from the US consultancy, Bates White.

GCR emphasises the scholarly credentials of our economists and the strength of our academic network. Furthermore, the excellent E.CA team has nine Who’s Who Legal nominees, including four Future Leaders, which speaks – according to GCR – to the quality of our team up and down the ranks.

We want to thank our clients and partners who have contributed to this ranking year after year with their positive reviews and recommendations.

DG Competition of the European Comission commissioned a consortium with a study to support the revision of the EU Guidelines on State aid for environmental protection and energy (EEAG) and the General Block Exemption Regulation (GBER). E.CA Economics was part of this consortium together with DIW Berlin, LEAR, SheppardMullin and University of East Anglia.

The report provides  with background information for the review of the EU Guidelines on State aid for environmental protection and energy (EEAG) applicable in 2014-2020 and on the provisions applicable to aid for environmental protection and energy (Section 7) of Commission Regulation (EU) 651/2014 (GBER).

The study consists of three study items.

Transparency, Tendering, Broadening

This study item examines whether and how the transparency of environmental protection costs of decarbonisation aid schemes should be increased by quantifying both the benefits to environmental protection and their costs. It also addresses whether tendering requirements in aid schemes should be extended. Finally, the study item assesses whether environmental protection schemes can be broadened to different sectors and technologies which could advance the same environmental protection objective to a similar extent, rather than being sector- or technology-specific.

Operating Aid vs. Investment Aid

The challenges of the green transition might require new types of aid and the traditional distinction between operating aid and investment aid needs to be re-examined. Hence, study item 2 examines the effectiveness and distortive effect of different forms of aid by reviewing the existing literature, case stud-ies on four representative schemes and modelling hypothetical future aid schemes in important sectors.

Energy intensive Users

This study item assesses whether the currently used economic parameters to determine the eligibility of sectors for exemptions from decarbonisation levies for Energy-Intensive Users (“EIUs”) are the most relevant parameters for the risk of relocation from an economic perspective. Further it aims at determining the extent to which the profitability of EIUs is affected by different levels of Renewable Energy Sources (RES) and Combined Heat Power (CHP) levies on electricity for a sample of 10 sectors.

Interested in the main findings?

Please contact our experts. They can answer all questions.

• Elżbieta Głowicka
• Anselm Mattes

E.CA representatives also involved: Hans W. Friederiszick, Jan Christopher Rönn

Link to full report

DG COMP of the European Commission has published a study conducted by a consortium led by E.CA Economics on State aid in the field of rail transport. The results of the study support the Commission in the revision of the current Community Guidelines on State aid for railway undertakings. The consortium included E.CA Economics, LEAR, Sheppard Mullin, UEA and the Institute for Transport Studies at the University of Leeds.

In the context of the European Green Deal, the European Union aims at doubling rail freight traffic by 2050. The revision of the current Railway Guidelines is aimed at supporting this ambitious goal. It provides detailed market information, based on desk research and data collection.

The low modal share of rail (only 8.8% of total freight transport) endangers important goals in environmental and transport policy.

Compared to highly polluting road transport by truck, rail freight is a safe and low-emission type of transport. A substantial rise in the rail modal share will require improvements at three different levels of the overall rail freight system.

More, better and modern infrastructure

As of now, bottlenecks in rail network lead to congestion and slow and unreliable delivery times; outdated infrastructure makes cross-border transport tedious; facilities like intermodal terminals with outdated technology increase transport times and costs; private sidings are often missing to connect customers to the rail network.

More and up-to-date rolling stock

The existing fleet of rolling stock will not suffice for a substantial increase of the rail modal share. Furthermore, a significant share of the rolling stock is outdated and not fit for future requirements, such as automated coupling etc.

Rail freight must become competitive with road transport

Rail freight is in close competition with road transport, especially in combined transport and single-wagon transport. Only if it’s overall cheaper, shippers will choose rail transport instead of road transport. At the moment, rail freight is not competitive in many cases – as the low modal share proves.

Public policies can improve this situation with a modern State aid framework that encourages the modal share.

The study provides data on the rail freight market, such as the costs and revenues associated with rail freight. It alsoprovides policy options, including examples of good practices, for the design of State aid for rail freight which can support and guide the revision of the Railway Guidelines.

Contact

If you want to get more insights and results please contact our experts.

• Elżbieta Głowicka
• Anselm Mattes

Download policy briefing

Download full study

We are delighted to announce that Alena Kozakova, our Director in the E.CA’s London office, has been appointed as a Non-Executive Director of the UK’s Board of Gas and Electricity Markets Authority (GEMA), alongside her role at E.CA.

As a Non-Executive Directors, Alena will be responsible for bringing independent oversight and support, and help guide the Office of Gas and Electricity Market (Ofgem) work on current and future challenges – from restoring resilience in the energy market to maintaining progress towards the UK’s net zero goals.

Alena’s appointment is a recognition of her outstanding skills and contribution as an economist in the public and private sectors. We are convinced that Alena will fulfill her tasks at GEMA in her usual excellent manner. We are very proud and happy to have you in the E.CA team. Congratulations, Alena.