The evaluation of competition effect on rail fares using the difference-in-difference method through symmetric and lagged spans

Abstract

Long-distance railway markets in Europe have become more competitive since the EU liberalisation packages. Countries like Austria, Czechia, Sweden, and Italy have experienced sustained competition, providing valuable insights into how open-access competition works. Italy's non-subsidised high-speed competition is especially interesting to study. While some researchers have studied the minimum price changes before and after a newcomer enters a route, more is needed about the duration of the effect and the impact on all fare types. Our paper estimates the competition's impact by observing the price dynamics of the incumbent company (Trenitalia) for different fare types over an extended period. We examine the Turin-Milan-Venice route where the competitor (Italo) entered the market during observation. We distinguish between different fare types through detailed descriptive analyses of the incumbent company's price behaviour. Using the difference-in-difference method, we obtain estimates of the effect for different time spans and check their robustness.

Two methods are used to design difference-in-difference models: a “classical approach” that compares symmetrical intervals before and after entry and another approach based on the comparison of lagged intervals. The second method compares the specific span with the corresponding one, a year before to exclude the seasonal component. Our findings reveal significant price-reduction effects compared to the price dynamics in other market routes where competition had been introduced.