Question

To what extent is UK railway market contestable?

Answer 1

ANSWER:

A market contestable refer to a market where there is freedom to enter and exit. This indicates there will be low (or zero) sunk costs in the industry. A sunk cost means a cost which cannot be recovered on leaving the market (such as expenditure on advertising). Thus, the amount of sunk costs will determine the contestability of UK railway market.

The railway market in UK we find numerous barriers to entry which make the market incontestable. The reason is that the fixed costs involved in building a rail network nationwide are prohibitively high for any new firm to consider building its own network. Thus, any new firm would be using the existing rail lines (managed by Railtrack). Moreover the nature of this business is that it is only one train company can use a lines at a time. Thus only element of competition in trains is through the franchising system, where firms bid for the right to run a line for a period of many years. But, if a firm generates supernormal profits running a line, there are barriers to entry preventing a new firm entering market.

Thus we can conclude that rail freight markets in UK are likely to be imperfectly contestable, and thus the impact of potential competition will be relatively small