High-speed rail pricing: Implications for social welfare

•We study the competition between airline and HSR when HSR adopts fixed pricing.•Welfare effect of a reform to change HSR price from fixed to variable is discussed.•Due to demand-side network effect, HSR traffic may increase with the fixed price.•Market structure and HSR’s objective are crucial for evaluating the pricing reform.•Social welfare may be greater under fixed price if that fixed price is low enough. This paper studies the competition between air transport and high-speed rail (HSR) when HSR adopts fixed pricing, and investigates the welfare effect of a reform to change HSR price from fixed to variable. We find that, first, due to the demand-side network effect, HSR traffic may increase with the fixed price. Furthermore, when the HSR operator is a social welfare maximizing monopoly, consistent with general industrial organization theory, social welfare will always increase if HSR moves from fixed price to variable price. However, when the HSR operator maximizes its profit or a weighted sum of profit and social welfare, or when the HSR operator and the airline compete, because of the interaction between the air and HSR services and the horizontal product differentiation of HSR services, social welfare may be greater under the fixed price if that fixed price is sufficiently low.