Oxera has been commissioned by the Passenger Demand Forecasting Council to provide advice on dynamic effects on the demand for passenger rail in the British market. The work is being carried out with a number of academic advisors. The analysis has been completed, and the final presentation to the client is on February 2nd. Thereafter, the results will be incorporated by Dr Wardman into his update of the Passenger Demand Forecasting Handbook (PDFH), which the Council is responsible for producing, and which is used by practitioners in the British rail industry to forecast the demand for rail services. Currently, all elasticities of demand presented in the PDFH assume that the effects of changes in fares, timetables (including station-to-station journey time, interchange and headway) and delays are fully incorporated into passenger behaviour within one year. However, there is a growing body of evidence, both for rail and other modes of transport, suggesting that dynamic effects are longer lasting and more complex than the PDFH currently assumes. In addition, the Handbook currently contains rather limited evidence on 'ramp effects' - the time it takes for demand for new stations or routes to build up to the expected equilibrium level. We have undertaken two pieces of primary research - the first being the estimation of long- and short-run elasticities of demand to changes in price, timetables and delays in five different market segments, and the second being the estimation of revised ramp-up factors for new rail services. We have obtained a number of important results. Previous rail industry studies have provided conflicting evidence on the speed of adjustment to the long run. A meta analysis conducted for this commission by Dr Wardman demonstrated that studies using industry-standard four-weekly data provide evidence of faster speeds of adjustment in response to changes in price than studies using annual data. Our econometric analysis suggests that previous studies using four-weekly data have not taken account of significant higher-order lags, either due to the use of a partial adjustment model, or a simple error correction model. Using four years of four-weekly data on over 700 flows, we have opted for a fixed effects, unconstrained error correction model, with changes in volume being explained by changes in and levels of price, delay and timetables, and lags of up to three years of volume and the three explanatory variables, plus GDP. In contrast to the previous studies using four-weekly data, which have shown speeds of adjustment of up to one year, we find that adjustment to equilibrium takes between one and four years, depending on the variable being changed, and the market segment. For the covering abstract please see ITRD E135207.
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