Market Pressure from Substitutes

However all British firms have to deal with the same tax situation, and not all firms compete for European journeys, indeed or are close enough to the southern coast to want to compete for European journeys. So the tax situation cannot be the only reason why 12000 firms have disappeared, especially when one considers that although the southern region has had a considerable loss of businesses in Road Haulage the reduction has been spread through all regions.

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Because of this difference in how the fiscal policy effects firms it would be wise to analyse other factors that could have had an effect. One example of this is competition from other industries providing similar goods. The alternatives to using Road Haulage firms include Air and Rail for domestic haulage. However as mentioned these methods are less suited to business to business logistics because aeroplanes and trains can only stop where there is an airport or station whereas a Lorry can stop anywhere.

As some taxes have risen which effect the road haulage industry it is logical to suggest that some of the trade has been lost to the alternatives. By using raw figures for million tonnes transported per year we can see how much trade has been lost or not from road to air and rail. The Figures suggest that since the advent of the latest Labour Government in 1997 Road Haulage usage has been affected with a quantity moved of 4% or 62m tonnes, whilst Rail haulage has been largely unaffected with a downward trend continuing. Air usage has risen considerably up 65% over 6 years or 0.

927m tonnes. The upward trend in Air Haulage has continued from ’92 to’98 which does not take account for any fiscal policy changes that have been brought in since the new labour Government. As we only have one figure for a post 1997 year it is not possible to say whether air freight has been effected, therefore rail is fairer comparison. To assess whether competition has been lost to Rail and Air haulage since 1997 cross price elasticity of demand (X? D) can be used. This will assess the strength of any substitute or compliment relationship.

This is important so to determine whether competition from substitutes have resulted in changes in the market, rather than changes due to the fiscal policy since 1997. This approach assumes that companies only decide on method of transportation of goods on cost. However this assumption generally holds true and so X? D is an appropriate method to use. It is expected that the reduction in the tonnes moved by road haulage since 1997 and the stagnant movement of the billion tonnes per kilometre ratio to be due to a lower cost of rail and air transport costs.

Below the relevant information is listed to be used in the X? D formula. The data above lists figures for different years. This coursework piece is concerned with what has happened since 1997 therefore statistics have been used from 1997 onwards. The results show that rail costs have risen and yet there has been a fall in demand in road haulage which would suggest that the two goods are compliments, whether this is true will be examined later. The results also show that the drop in demand for Road Haulage has coincided with a drop in price for air haulage and so the goods are substitutes to each other.

The level of elasticity here is important. It is clear that the increase in rail of 5. 6% has had a similar but not as greater percentage change in the amount demanded of road haulage. This would lead to the conclusion that the relationship is very slightly inelastic or unitary elastic. On the other hand the relationship between Air and Road freight is an inelastic one, big changes in the price of air freight have only had a small change in the amount demanded of road haulage.

This can be seen clearly in the diagrams below. The result of these elasticities is that it is possible to conclude that Road haulage has suffered at the hands of competing industries, Whether rail or air have had a bigger role to play in this change and the extent to which this relationship is true will be looked at further on in this section. It is important to look at what these changes mean; The goods have changed their equilibrium level of consumption for the above relationship to occur.

However this will not have been in one move rathermore in stages or shifts as shown in the graph below using rail haulage as an example The graph above shows that as the market position changes the maximum amount of rail haulage that an be consumed decreases and the maximum amount of road haulage increases, due to changes in demand and the resultant reduction or increase of firms in the market to service this demand. One would expect that the increase in output shown in the PPF graph above would increase profits and so attract more firms into the monopolistically competitive market.

It is essential to examine the effects of this, as to judge the role fiscal changes have had on the market The result of this would suggest that more firms would enter the market due to the profits to be made in the industry which is shown below. However this has not been the case as the PPF for the haulage industry shown above. The growth in the capacity of road haulage as shown in the PPF graph has seen the billion tonnes per km rise from 124. 6 in 1991 to 149. 6 in 1997. It has been stagnant ever since. This would suggest that there is no growth in the market.

The reduction in firms in the market would suggest that the market is becoming more concentrated as firms try to gain market power and would suggest that the market is over populated and that profits cannot be made until firms drop out of the market as shown below It is feasible that the above situation is what the Road Haulage industry is in. This would lead to the analysis that either the industry is going through the natural cyclical effect around its equilibrium, or demand is low due to an exogenous shock to the economy, or finally average costs are artificially high and are crippling the economy.

This could be due to taxation. However it is not the aim in this section of the coursework to assess which is true, but to assess whether the price elasticity situation is true and that the losses of the rail haulage have been the gains of road haulage. The above would suggest that it is internal changes within the industry that have been the main factor, however this does not rule out any effects from cross price elasticity, could it be masking the extent of the change?

It is essential to assess this. The idea that there is a cross price elasticity of demand between road and rail haulage assumes that there is a legitimate link between the Road and Rail haulage industries, that they are genuine substitute goods. It should be examined whether the circumstances surrounding the different types of haulage warrant the classification of ‘not linked’ rather than substitute goods or compliment goods. For example Rail mainly transports coal.

In the last decade there has been a ‘dash for Gas’ which has resulted in many coal fired Powerstations being converted to gas fired Powerstations to meet agreements such as the sulphur protocol and the Kyoto agreement of the early ’90s. If they were not linked then it would change the relationship between the downturn in Rail and upturn in Road Haulage. For there to be proper connection between the two industries they have to have similar characteristics. It is not enough to say that the industries both transport goods and therefore they will be substitutes.

For example in a simplified situation Road Haulage might only transport food and was not able to transport Metals, whereas Rail was only able to transport metals and not able to transport food. Although both industries transport commodities their markets are not linked and are unable to overlap so it is impossible the substitution effect to occur. This situation would never exist but it is important that we examine the specifics of each market as to ascertain whether they are true competitors. The table below outlines the commodities that both industries mainly transport.