Research On The Incentive Price Regulation In China’s Railway Industry

Ever since the reform and opening up, China’s national economy has been growing rapidly and continuously; the railway industry has achieved unprecedented rapid development and expansions as well.At the same time, as an important component of China’s large-scale economic system reform, the railway industry has also gone through a historic evolution progress from highly centralized and strictly controlled to deregulation and the introduction of competition, in which the reform of the railway price has been initially realized the separation between pricing and the right of price-adjustment, and both the forms and contents of the railway price has been increasingly diversified and multi-layered. On March2013, the long-awaited system reform in China’s railway industry has finally been settled; the64-year-old Ministry of Railways is divided into three; the National Railway Company was established to exercise the cooperate responsibilities of the former Ministry of Railways; the market-pricing progress in railway industry is accelerating. On the other hand, the rapid development of the motor car and the high-speed rail recently in our country has provided residents with a more convenient and comfortable means of transportation, and greatly promoted the growth and development of China’s railway transportation industry. From the perspective of consumers, as opposed to the traditional ordinary trains, high-speed trains, despite of its high price, offer passengers another transportation choice with its fast speed, comfortable environment and good service, which can be regarded as a product differentiation strategy of the railway transport enterprise. Therefore, in the current situation of reform, there is an increasingly urgent need to put forward a suitable price regulation scheme.Research on China’s railway pricing regulation will contribute to a scientific explanation for regulatory regime and regulatory principles; it will also provide a theoretical reference for our country to establish an effective system of price regulation; nevertheless, it will help to complete government’s regulatory policies and institutions regard on natural monopolies during the economic-transition period. On the other hand, since the railway industry which serves as the lifeblood of the national economy accounts for a large proportion in the whole economy, its reform experience and performance has a far-reaching impact for the deepening of China’s transition economy development. Therefore, the study of China’s railway transportation price regulation has important theoretical and practical significances for the practice of China’s transition economies. Based on a summary of China’s railway price regulatory history, this paper analyzes the problems to be solved in railway pricing, elaborates the necessities to apply incentive price regulation, establishes a theoretical model for incentive price regulation combining the product differentiation theory, examines the application of incentive regulation theory in practice, which is Price-cap regulation, and proposes a price-cap model suitable for current China’s railway industry, at last suggests policy recommendations for the incentive price regulation reform in the railway industry.Innovation of this paper is mainly reflected in the combination of product differentiation with the Baron-Myerson model, and its specific application to China’s railway transportation industry to investigate the price regulation on a monopolist offering various products. Considering both the interdependence of demand and cost functions, and assuming that the enterprise provides substitutes which are ordinary trains and high-speed trains, this paper establishes a model to derive the effects of economy of scope and substitute on regulated price.Through theoretical analysis of the model, this paper believes that it can encourage enterprises to reduce production costs by transferring certain information rents to the enterprises; and the regulator’s regulatory objectives would have an impact on the policy effects. In short, the essence of incentive regulation is to achieve a balance between firm’s internal production efficiency and social allocative efficiency through the design of an incentive mechanism. On the other hand, costs independence lowers the regulated price due to the existence of economies of scope, which allows manufacturers to internalize positive externalities between products by reducing the price of each product; whereas the correlation between the demand functions has a positive effect on regulated price. This suggests that the existence of product differentiation reduces the monopolist’s price level, and the emergence of high-speed trains should be made to reduce the price of ordinary trains in reality. In the application of practical policies, Price-cap, as a strong incentive pricing form, is a useful reference for China’s current railway price regulation. Certain amendments should be made for the Price-cap model based on the current market situations in the policy-making process, in order to overcome or weaken the inherent defects of the model, and to make it more effective in stimulating the efficient production of railway companies. In this way, it can achieve the regulatory objectives to optimize resource allocation and to maintain public welfare.