Multi-equation travel demand models application to the air-rail competition in Great Britain

Abstract

The main purpose of this research is to develop a set of econometric Air-Rail competition models which are sufficiently sensitive to measure the effects upon demand of policy decisions, with regard to such variables as frequency of services and fares. Existing Modal Competition Models have, rather uncritically, applied Multiple Regression analysis in considering only one aspect of the market, namely the demand for travel, ignoring therefore the effects of the supply upon the demand. The emergence of the so called "Simultaneous Equations Bias", due to the two-way dependency between the demand and the level of service factor expressing the supply, renders the application of the 015 (Ordinary Least Squares) inappropriate, and hence, yields biased, inconsistent, and inefficient OLS coefficients. The models, developed in this study, depart from all existing Modal Competition Models, and overcome some of their drawbacks. They are formulated as Multi-equation Supply/Demand Modal Competition Models. They introduce the frequency of services variable not only in the demand, but also in the supply equation expressing the level of supply in response to changes in other variables. In order to derive unbiased, more conSistent, and more efficient coefficients, sophisticated statistical techniques, such as 2315 and JSLS (Two-Stage Least Squares and Three-Stage Least Squares) • are applied as a means of calibration. The elasticities obtained are consistent with the Supply and demand Microeconomic Theory. The frequency of services appears as the most powerful explanatory variable in Air demand; whereas fare and income are the most powerful variables in Rail demand equation. This leads to the conclusion that Air mode is mainly higher income groups and/or business oriented market; and Rail mode lower income groups and/or personal oriented market. Furthermore, Air and Rail are competing on a fare basis in short routes; while they do not show close substitutes for each other in longer ones. The high significance of the frequency of services, in Air demand, outlines its importance as a factor influencing the demand, and therefore, provides the Airlines management with the capability of improving the demand by acting upon the endogenous factor. This is of great interest in the scheduling fleet process. Similarly, the significance of Rail fare variable offers the Railways management the possibility of acting upon the demand through this controlable variable, for an efficient pricing policy. Rail journey time elasticities, derived from these models, are very close to the elasticities assumed by British Railways Board, in their Passenger Traffic Model, 1980. The statistical results indicate that the elasticities derived are useful for both analysis and forecasting purposes.