Some theoretical aspects of excess capacity: some considerations for Australia's newly created national rail network

Abstract

The Australian National Freight Corporation (NFC) has received A$800 million to invest in a national railway network with the objective to make the system commercially viable within five years. Massive upgrading of infrastructure and staffing will occur. Railways have found it difficult to shed excess capital infrastructure in the past although shedding labour has seemed to occur throughout the last decade without many difficulties. It has been argued in the literature that economies of scale may be inherent in the railways industry. With such major investment capital in the NFC, excess capacity could be a component which will need careful consideration. The ‘pre‐commitment’ argument for using excess capacity as an entry deterrant is reviewed and the notion of ‘limit pricing’ is incorporated in entry deterrant behaviour. Limit pricing and demand elasticities impacting on excess capacity under cyclical and growth expectations are considered. It is questionable whether excess capacity in the NFC can be measured. It is the purpose of this paper to argue that although excess capacity may be an elusive concept, it has dominated the political and administrative objectives of Australian rail systems in the past and could well continue to influence the behaviour of the National Freight Corporation.

Key words:

• Rail systems
• excess capacity
• limit pricing
• Australia