We can see that Road Haulage mainly transports food, drink and tobacco, these are perishable goods. Perishable goods are characteristically low weight and not transported in bulk because the retail industry cannot sell enough before it perishes to warrant transporting in bulk. Indeed food, drink and tobacco is usually transported to numerous individual shops or chain stores.
Transporting by rail is not possible because of the huge infrastructure cost of having a railway line to every shop that is to be supplied, if it were to be done the price of transporting to each shop accounting for the infrastructure cost would become restrictive and planing laws and urbanised areas means railway lines cannot be built. Rail haulage is characterised by the transportation of coal primarily. This is a non-perishable good and is very heavy and is needed in large quantities (with the exception of the insignificant home use market).
Also it is generally only needed at a small number of locations across the country, eg. Powerstations. The cost of adding a railway line to a Powerstation as a proportion of the cost of the site when building it is tiny compared to the cost of adding a railway line to a shop like with the example above. The suitability of the Road network for the transportation of coal is dubious. Powerstations need a massive amount of coal; UK lorries can only carry 40 tonnes at a time. This would result in the need for large convoys of trucks which is an inefficient use of resources.
E. g. many lorry drivers are needed in a convoy where a one train could carry the same amount and only needs one driver, here there is an inefficiency in the use of labour. Another reason is that lorries have to stop and start, and with such heavy loads, more fuel is used, a limited resource, a train does not have to stop and start and only needs to have one engine to pull the load whereas the lorries have to have tens of tractor units to pull the same amount. Therefore using a train is a more efficient use of resources, and therefore will be cheaper per tonne carried.
The result is that the Road Haulage network is unsuitable for crude resources such as Coal and Metals. However the second most transported material for the road haulage industry is crude minerals. This would suggest that the road network is suitable for the transportation for all crude resources. Minerals are often used in the construction industry. It is not efficient to set of a railway to a construction site to transport minerals and other building materials because the demand for the resource is not permanent, a Powerstation or Steel Factory’s demand for primary resources is.
Therefore the possibility that the Road network is suitable for coal on the basis that it transports a lot of a good with similar properties should be discounted. Although there core markets are not transferable between the two industries we can see from the table below that there are some goods that are transported on road and rail. It can therefore be concluded that the suggestion that Road and Rail haulage industries have a substitutional relationship is not completely true.
Although the peripherals of their markets have a substitutional effect as we can see from the table above the core markets have an inelastic demand for each type of transportation of goods because of the unsuitability of other methods. As it has been proved that it is true that Road and Rail are not real substitutes it would follow that the downward trend in Road usage is not due to the substitutional effect of more usage of the rail network. This is compounded by the fact that Rail usage has declined in other markets than coal as the table below shows.
(we should ignore coal because this has declined because it is no longer demanded for political reasons rather than coal being transported by other methods). Market Behaviour We have come to the conclusion that the market is not particularly affected by competition from substitutes. It could be as a result of other situations. An important factor in changes within an industry is how the market is reacting, and can be changed and shifted as a result of changes to the Fiscal Policy.
It can be reasonably assumed that the haulage market falls into the category of a monopolistically competitive market. This is because although the products are usually thought of by the public as being completely homogenous they are in fact not. Firms spend a lot of money in advertising, image and gimmicks on an attempt to differentiate themselves from the competition. For example Eddie Stobbart has created a brand image because of the drivers uniform, clean trucks and simple distinctive livery, they even have their own merchandise shop.
If firms have differentiated themselves this far from other firms the market cannot be assumed to be a perfect market, this is compounded by the fact that the perfect market ideals are only theoretical. To be monopolistically competitive the firms in the industry have to be small in size and are not interdependent and reliant on decisions on other firms to set their own price. This is generally true of the Haulage industry. As the market in monopolistically competitive changes in the market are frequent.
This may be the case in the Road Haulage market, and so it is important to assess what changes may be taking place in the Road Haulage market. The market is not as strongly monopolistically competitive as other markets such as the car industry. The result of this would be that firms will drop out of the market as they are bought out by larger firms who can force prices down due to their economies of scale, standard effects of market pressure. This is a possibility as the market has lost 12000 firms but has maintained the same volume.
This might be because of fiscal changes, and creating a shift in average costs from AC2 towards AC1; Does the market have relatively high barriers to entry? This would help to understand why firms are dropping out of the market but not being replaced by new firms. This market has been traditionally seen as a market with low barriers to entry as a truck and driver is all that is needed to compete. Traditionally there have been many sole traders in this industry, however it can be seen that this trend is changing.
Firms are increasing in size to compete, for example Denis Dixon have expanded their fleet to survive from 22 to 36. This suggests that the Minimum efficient scale to operate the firm is increasing. As shown below This means to compete more lorries are needed and so it can be said that barriers to entry are rising. The need for greater economies of scale to compete would explain why 12000 have dropped out the market since 1997. How does this change in the market effect the relationship to fiscal policy?
If firms need to be bigger to compete and survive in the market then the casualties in the industries can be explained thus, rather than through increased taxes. However it could be said that it is because of the greater taxes that firms need to be bigger, gaining greater economies of scale to compensate for the increased running costs. Changes in Market Position due to Fiscal Policy changes This is the overall situation in the market traditionally, however there have been problems in the market with many companies complaining that the climate has changed and that UK firms can no longer compete.
They have alleged that this is because of excessive taxes which drive up costs to a point where other European firms can provide the service and make profit at what it costs the UK firms to complete the job. If the costs have been driven up we can represent this on the market situation graph seen below and compare what happens when a foreign firm has a different situation. We can see the huge difference that an increase in costs can have on the profit margin, although still making supernormal profits conpany number 2 is making considerably less money than firm 1 and is charging a higher price for it.
Could this be the case in the UK Haulage industry? It is confirmed that costs in the industry have increased since the labour Government took power in ’97; i?? 0. 85 (1995) versus i?? 1. 18 (2001) (Source: Dennis Dixon Ltd) but how can we be sure that this increase is not down to inefficiency but tax? With the example above this particualr firm has expanded its operations from 42 eomplyees in 1995 to 72 in 2001 and fleet size up from 22 to 36 in the same time period, and turnover is up 65%.
However are they being anymore efficient other than a normative judgement of the company is seemingly sucessful therefore must be efficient. Efficiency of Firms in relation to the changes in Fiscal Policy Efficiency is achieved productively when the marginal cost of the last product produced is at the lowestpoint of the Long Run Average Total Cost as shown below. However it is not to be expected that any firm is perfectly productively efficient. It is also not possible to assess on average the efficiency of firms in the industry as data for this is not available for obvious reasons.
To gain a broader insight it can be assumed that inefficient firms will be driven out of the market by more efficient (and often larger as they have access to economies of scale) firms. We have access to data relating to the amount of firms in the industry. It would normally be expected that when costs rise that a proportion of that be past onto the customer unless it is a perfectly elastic market. As it was highlighted early on, the market has little competition from other haulage methods such as rail. It can be therefore concluded that the market is relatively inelastic so long as there are no special circumstances.
In the case of the road haulage industry it is fair to say that the market acts normally and we can take it as granted that the market is relatively inelastic. If the most of the extra cost is past onto the consumer then demand will decrease as we can see in the graph below. As the graph shows most of the added costs due to the higher taxes are past onto the consumer and there is a resultant drop in demand. This drop in demand is not actually shown over the period of 10 years but is shown from 1997 when the Labour Government came to power in the UK.
In 1997 it was estimated by the RHA (Road Haulage Association) that there were 65,300 firms, yet four years later in 2001 they estimate that only 52,600 firms existed. This reduction in the firms could because of the lack of efficiency which meant upon the increase in tax the firms were unable to cope. This would normally suggest that this would result in a reduction of the industry as a whole. However this is not necessarily true. In 1997 there were 422,000 Vehicles over 3. 5 tonnes on the road, yet in 2001 this figure has risen by 8,000.
This suggests that the market has no problem in coping with the taxes, other than casulties of small inefficient firms and that more efficient firms have prospered in a decreasing market. A point which the table above addresses is that the amount of lorries on the road have increased, yet the amount moved has decreased. This does not logically fit, as a reduction in the amount of goods in tonnes moved would suggest the need for fewer lorries. However the average weight of goods carried needs only to decrease over the period for the need for lorries to increase to carry the lighter goods.
This suggests that raw tonnage does not fairly represent the demand for haulage. If we took the figures for billion tonnes per kilometre we would be able to have a true reflection of the demand. This table shows that the demand level has not changed in the post 1997 era to any considerable degree and so it would suggest that the rising costs in the industry have contributed towards the change. The Haulage industry has complained that the fuel price escalator has caused a considerable rise in the costs of running lorries.
This is true, the price of fuel in Britain is the dearest in Europe as proved earlier. However, it would be Government failure not to account for negative externalities when controlling fiscal tactics towards industries. A recent research piece conducted by the Oxford Economic Research Associates concluded that the taxes levied on HGVs only account for 70% of the costs they impose on the public, and only 59% of the damage they do to the roads. This would suggest that the Road Haulage association are calling for protectionism rather than a fairer deal.