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Welfare Trade-Offs in US Rail Mergers

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Author Info
Ivaldi, Marc
McCullough, Gerard

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Abstract

Since the publication by Williamson (1968) of his seminal paper on antitrust there has been a growing recognition by regulators of the need to assess trade-offs between merger-related efficiency gains and merger-induced increases in market power. This paper addresses that need by presenting a structural econometric model of recent mergers in the US rail industry. The paper extends the structural methodology by evaluating actual (as opposed to simulated) merger effects and by incorporating parametric estimates of merger efficiencies. Our empirical finding is that consumer surplus in US rail freight markets increased by about 30% between 1986 and 2001 despite dramatic industry consolidation, suggesting that to date the Williamson trade-off has favoured rail customers. We find that behaviour in these markets is consistent with the Kreps-Scheinkman (1983) model of a two-stage game where capacities are chosen first and then prices are set to give the Cournot outcome.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5000.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5000

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Related research
Keywords: differentiated product markets; logit models; merger analysis; railroads;

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, January.
  2. Wilson, Wesley W, 1997. "Cost Savings and Productivity in the Railroad Industry," Journal of Regulatory Economics, Springer, vol. 11(1), pages 21-40, January. [Downloadable!] (restricted)
  3. Lars-Hendrik Röller & Robin C. Sickles, 1997. "Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry," CIG Working Papers FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
    Other versions:
  4. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March. [Downloadable!] (restricted)
  5. Ivaldi, Marc & Verboven, Frank, 2005. "Quantifying the effects from horizontal mergers in European competition policy," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 669-691, December. [Downloadable!] (restricted)
    Other versions:
  6. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer. [Downloadable!] (restricted)
  7. Winston, Clifford, 1985. "Conceptual Development in the Economics of Transportation: An Interpretive Survey," Journal of Economic Literature, American Economic Association, vol. 23(1), pages 57-94, March. [Downloadable!] (restricted)
  8. Burton, Mark L, 1993. "Railroad Deregulation, Carrier Behavior, and Shipper Response: A Disaggregated Analysis," Journal of Regulatory Economics, Springer, vol. 5(4), pages 417-34, December.
  9. Denis A. Breen, 2004. "The Union Pacific/Southern Pacific Rail Merger: A Retrospective on Merger Benefits," Review of Network Economics, Concept Economics, vol. 3(3), pages 283-322, September. [Downloadable!]
  10. Ivaldi, M & McCullough, G J, 2001. "Density and Integration Effects on Class I U.S. Freight Railroads," Journal of Regulatory Economics, Springer, vol. 19(2), pages 161-82, March. [Downloadable!] (restricted)
    Other versions:
  11. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer. [Downloadable!] (restricted)
  12. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  13. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kristof De Witte & Elbert Dijkgraaf, 2007. "Mean and Bold?," Tinbergen Institute Discussion Papers 07-092/3, Tinbergen Institute. [Downloadable!]
  2. Friebel, Guido & McCullough, Gerard & Padilla Angulo, Laura, 2008. "Patterns of Restructuring: The U.S. Class 1 Railroads from 1984 to 2004," CEPR Discussion Papers 6836, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Dennis W. Carlton & Randal C. Picker, 2007. "Antitrust and Regulation," NBER Working Papers 12902, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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