Research 350 - NZ Transport Agency

ECONOMIC DEVELOPMENT BENEFITS OF TRANSPORT INVESTMENT
2.5.2.5 Imperfect competition
Issues
SCBA implicitly assumes the existence of perfect competition throughout the economy. A key
issue then becomes the level of competition extant within a given scenario and to what
extent departures from this assumption matter.
Critics of SCBA argue that the assumption of perfect competition tends to understate
benefits. For example, if competition is imperfect, a new transport improvement could
strengthen competition within a given industry. This in turn, may result in lower prices to
consumers. This may be especially true if a given industry is dominated by a monopoly or
oligopoly. However, such benefits will not be recorded by SCBA as it assumes that the
economy already reflects perfectly competitive outcomes (BTE 1999, pp. 23-26; SACTRA).
Austroads, Venables and Gasiorek, and Mohring and Harwitz have argued (in various ways)
that the assumption of perfect competition has resulted in SCBA understating benefits of
transport investment (BTE 1999, pp. 23, 89-92). While Venables and Gasiorek focus on the
issue of agglomeration fostering competition, noted above, Mohring and Harwitz, focus on
the extent to which ‘elements of monopoly’ present within the broader economy may lead to
an understatement of transport investment benefits (BTE 1999, pp. 1-92).
Likewise, SACTRA views the assumption of perfect competition as an important issue
(SACTRA 1999, paras. 3.45-3.53, 4.43-4.78). It concludes that ‘imperfect competition in
transport-using sectors can mean that conventional measures of SCBA fail fully to capture the
economic benefits of transport schemes…explicit consideration of endogenous growth and
competitiveness makes this failure potentially more serious’ (SACTRA 1999, para. 4.74). At
the same time, SACTRA’s work indicates that in some circumstances SCBA’s assumption of
perfect competition may overstate benefits (SACTRA 1999, para. 4.51) and that there is still
no compelling evidence of large errors due to the assumption of perfect competition within
SCBA (SACTRA 1999, para. 4.74).
Recent analysis by Preston and Holvad (2005), explicitly designed to follow up on SACTRA’s
findings, has also emphasised the need to allow for imperfect competition in estimating the
effects of transport investments. The authors refer to CGE modelling by Venables and
Gasiorek (1999), Davies (1999) and Newbery (1998) (all three of which were also noted by
SACTRA) as well as more recent CGE studies using the CGEurope model (Brocker et al 2004)
and the Dutch RAEM model ( Oosterhaven and Ellhorst 2003).
The focus of Preston and Holvad’s work is the development of a ‘multiplier’ which could be
applied to standard SCBA results (for road projects). This would correct for the assumption of
perfect competition and allow for the assessment of full economic benefits. By comparing
eight studies (including the work reviewed by SACTRA and the later studies employing RAEM,
CGEurope), the authors derive a general multiplier of 1.4, with a standard deviation of 0.4.
However, they caution that this multiplier will vary with particular regional circumstances. In
particular, variations may be created by the price elasticity of the final product market, the
extent of increasing returns to scale and backward and forward linkages, the extent of
agglomeration economies and market power (as measured by price mark-ups and the number
of firms in the market).
36