Effect of High-speed Train Introduction on Consumer Welfare

Abstract

This paper examines the impact of introducing high-speed trains on consumer welfare using South Korean transportation industry data. 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. I estimate a model of the demand for travel that incorporates consumers’ heterogeneous preferences over travel schedules into an otherwise standard discrete choice model. 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.