2012 Theses Doctoral

Industrial Organization Effects of High-Speed Rail Service Introduction in Korea

Baek, Jisun

The goal of this thesis is to investigate changes in consumers' choices and their welfare due to the introduction of new products, taking firms' reactions into consideration. I perform empirical analyses using Korean transportation industry data to evaluate the impact of high-speed train introduction on passenger travel. This work adds to the existing literature by considering the changes in product characteristics or the set of products offered to consumers after new product introduction, and investigates how those changes affect consumer welfare. The analysis provides a rich insight into the transportation industry and the relationship between the modes of transportation which contributes to enhancing the quality of government's policies regarding related industries. The first part of my thesis investigates the changes in utilization of different modes of transportation in Korea after the introduction of high-speed train using a fixed effect model and a difference in differences model. My results show the significant impact of the introduction of high-speed train on the entire transportation industry and provide evidence that modes of transportation not only compete but also complement each other. After high-speed trains were introduced in 2004, inter-city bus and airline industries lost their customers in routes where they directly competed with high-speed rails, while the numbers of rail passengers increased. The losses in the airline industry were particularly severe. On the other hand, the passengers of other rail lines for some routes not connected by high-speed trains but branch routes of high-speed rail lines, increased. The increase was perhaps induced by the consumers who traveled on those routes in order to reach high-speed rail lines. After the introduction of high-speed trains, other changes such as service schedule adjustment ensued. The results from the reduced form models show only the overall impact of high-speed train introduction, but they cannot disentangle the impact of high-speed train introduction itself from that of ensuing changes. In order to separately examine the impact of high-speed train introduction and that of ensuing changes in product characteristics, I estimate a structural model of the demand for travel that incorporates consumers' heterogeneous preferences over travel schedules into a standard discrete choice model. The model treats the rail company's choice of train schedules as endogenous in order to take the firm's choices of product line into account. My results show that consumers are affected differentially by both the introduction of high-speed trains and the ensuing changes in train schedules. The welfare implications for consumers depend on the availability of high-speed trains in their choice set. Consumers who travel between two cities that are connected by high-speed trains are the main beneficiaries of the new service. However, reductions in schedule frequencies of non-high-speed trains operating along high-speed rail lines, generate losses that offset 50% of gains even for these consumers. Travelers on these lines who are not served by high-speed trains only experience substantial losses due to reduced schedule frequencies. Consumers who travel between two cities that are not located along high-speed rail lines gain from increased train frequencies, and the gains make up for the losses in other markets without high-speed trains. These results highlight the importance of accounting for changes in existing products when analyzing the impact of new product entry on consumers.