High-speed rail and air transport competition: Game engineering as tool for cost-benefit analysis Nicole Adler a, * , Eric Pels b , Chris Nash c a School of Business Administration, Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel b Department of Spatial Economics, VU University, De Boelelaan 1105, 1081HV Amsterdam, The Netherlands c Institute for Transport Studies, University of Leeds, Leeds LS2 9JT, United Kingdom article info Article history: Received 26 November 2009 Received in revised form 7 January 2010 Accepted 7 January 2010 Keywords: Airlines High-speed rail Network optimization Applied game theory Infrastructure pricing abstract This research develops a methodology to assess infrastructure investments and their effects on transport equilibria taking into account competition between multiple privatized transport operator types. The operators, including high-speed rail, hub-and-spoke legacy airlines and regional low-cost carriers, maximize best response functions via prices, fre- quency and train/plane sizes, given infrastructure provision, cost functions and environ- mental charges. The methodology is subsequently applied to all 27 European Union countries, specifically analyzing four of the prioritized Trans-European networks. The gen- eral conclusions suggest that the European Union, if interested in maximizing overall social welfare, should encourage the development of the high-speed rail network across Europe. Ó 2010 Elsevier Ltd. All rights reserved. 1. Introduction In this paper we develop a methodology to analyze competition between imperfectly substitutable transport networks in the medium to long distance passenger market. Such a methodology may prove valuable to the development of transport policy. In recent years, the ‘legacy carriers’ have lost ground to the newly formed ‘low-cost’ carriers. Since liberalization, some regional low-cost carriers have performed admirably, whereas many legacy carriers have foundered; a number of car- riers are on the verge of bankruptcy, while others (such as KLM and Swiss) entered alliance agreements or mergers to ensure their long-run existence. The methodology developed in this paper may be used to explain airline performance and to predict the impact of mergers between legacy carriers. Another recent development in the medium to long haul transport market is the increasing interest in high-speed rail. Whilst air transport demand in the European Union grew at an average annual rate of 5% over the last decade, high-speed rail passenger demand has grown by 16% over the same timeframe (Janic, 2003). The European Union is considering increas- ing its financial assistance to these projects with the aim of encouraging the further development of connecting track across countries for purposes of economic and social cohesion. An additional aim, in terms of environmental transportation policy, is to encourage travelers to change modes, namely to move from air to rail transport (European Commission, 2001). An important reason for encouraging mode substitution, in an attempt to reduce the environmental impact of transport, is clearly explained in IPCC (1999) and Givoni (2007). The methodology developed in this paper can be used to predict the like- lihood of success of high-speed rail in the face of competition from airlines. We use the case of high-speed rail to illustrate the workings of the model. Specifically, we analyze the potential addition of Trans-European high-speed rail network (TEN) 0191-2615/$ - see front matter Ó 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.trb.2010.01.001 * Corresponding author. E-mail address: msnic@huji.ac.il (N. Adler). Transportation Research Part B 44 (2010) 812–833 Contents lists available at ScienceDirect Transportation Research Part B journal homepage: www.elsevier.com/locate/trb