A modal shift occurs when one mode has a comparative advantage in a similar market over another. Comparative advantages can take various forms, such as costs, capacity, time, flexibility, or reliability. Depending on what is being transported, the importance of each of these factors vary. For some, time is of the essence, and a modal shift will occur if the new mode offers time improvements or if new capacity is no longer available, while for others, it is mostly a matter of costs. The outcome is a series of decisions made by firms (for freight) or individuals (for passengers) to shift to another mode if comparative advantages are significant.
Comparative advantages can involve the difference in cost, time, level of service, comfort, or reliability between two modes. The higher it is, the more there is an incentive to switch from one mode to another. Modal shift often takes place over three phases:
- Inertia phase. Initially, a strong level of inertia makes modal shift a process that is slow and sometimes difficult to perceive. Only a few users may experiment with modal shift, often as part of a publicly subsidized initiative (e.g. government providing the initial funding to develop services). Inertia implies that the modal shift is often much less significant than expected, leading to a situation of underperformance. The reasons behind inertia are linked to accumulated investments and assets in the existing mode and its terminals. Thus, a corporation will be reluctant to relinquish those assets even if the comparative advantages of the other mode are significant. Management preferences also play a role as expertise was developed to manage flows in the previous mode and may be difficult to adapt to the new mode. The negotiation of new procedures and contracts are tasks corporations are unwilling to undertake if the benefits are not readily apparent. The fact that the existing mode has proven reliability, even if costly, will also play in delaying modal shift. This may incite modal rationalization, implying that given the existing (or perceived) competition, additional efforts will be made to more effectively use the assets of the existing mode. Supply chain management can also contribute to this inertia since a modal shift is likely to result in a change in the load unit, the frequency, and the time performance of freight flows, which requires an adjustment in practices. The early adopters of a modal shift are thus likely to be new transport ventures willing to risk testing an unproven distribution system for the potential rewards of being the first. Enterprises already facing high transport costs on the existing mode, or entities receiving government subsidies (or being regulated) to do so are also potential early adopters.
- Modal shift phase. This phase represents a fast transition from one mode to another as the industry acknowledges its advantages. The new transport mode evolves from a situation of underperformance to one of overperformance. As inertia involved a modal shift taking place at a rate lower than expected, the transition rate is faster than expected during the modal shift phase. This can take users and authorities by surprise with a rush to cope with additional infrastructure investments. A significant drop in comparative advantages triggers the end of this phase, as the new mode gets increasingly congested and as the previous mode loses traffic (closing of some routes, rationalization, price-cutting, etc.).
- Maturity phase. At this point, the market potential is reached with a new equilibrium in modal shares. Their respective comparative advantages are of lesser variance, implying limited incentives to shift cargo or passengers. The focus becomes modal rationalization; using more effectively modal assets.
A modal shift takes place in a context where from a macro perspective, there are changes in the transport supply. From a micro perspective, the decisions (behavior) of individuals (passengers) and firms (mostly for freight) are also changing. It is bound to endogenous factors (decisions by users and transport providers) as well as exogenous factors (cost factors, regulations, and policies).