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Simulating the Effects of Railroad Mergers

Author

Listed:
  • Joon Je Park
  • Michael W. Babcock
  • Kenneth Lemke
  • Dennis L. Weisman

Abstract

The purpose of this paper is to add to the empirical literature regarding merger simulation analysis by examining the effect of railroad mergers on railroad market power. This is done by measuring railroad profits and revenue/variable cost ratios corresponding to different degrees of intrarailroad competition for movements of Kansas export wheat to Houston, Texas. Two models are developed to achieve the objectives of the study. A network model of the wheat logistics system is used to identify the least cost transportation routes from the Kansas study area to the market at Houston. A profit improvement algorithm, which identifies Nash equilibrium prices, is developed to measure the amount by which railroads can profitably raise their prices above variable cost. The results of the study have implications for U.S. railroad merger policy. The paper indicates that railroad mergers do not necessarily increase railroad market power or make railroad shippers worse off. Instead, the study demonstrates that the impact of railroad mergers on shippers and railroads depends on factors that vary geographically, such as the degree of intrarailroad and intermodal competition in the area.

Suggested Citation

  • Joon Je Park & Michael W. Babcock & Kenneth Lemke & Dennis L. Weisman, 2001. "Simulating the Effects of Railroad Mergers," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 938-953, April.
    • Handle: RePEc:wly:soecon:v:67:y:2001:i:4:p:938-953
    DOI: 10.1002/j.2325-8012.2001.tb00382.x
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    References listed on IDEAS

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    1. Fuller, Stephen & Bessler, David & MacDonald, James & Wohlgenant, Michael, 1987. "Effect of Deregulation in Export-Grain Rail Rates in the Plains and Corn Belt," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 28(1).
    2. MacDonald, James M, 1989. "Railroad Deregulation, Innovation, and Competition: Effects of the Staggers Act on Grain Transportation," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 63-95, April.
    3. Lemke, Kenneth & Babcock, Michael W., 1987. "Impact of Rail Mergers on Kansas Export Wheat Rail Rates and Costs," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 28(1).
    4. MacDonald, James M., 1989. "Effects of railroad deregulation on grain transportation," Technical Bulletins 312302, United States Department of Agriculture, Economic Research Service.
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    6. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 407-426, October.
    7. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
    8. L. Orlo Sorenson, 1984. "Some Impacts of Rail Regulatory Changes on Grain Industries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 66(5), pages 645-650.
    9. James M. MacDonald, 1987. "Competition and Rail Rates for the Shipment of Corn, Soybeans, and Wheat," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 151-163, Spring.
    10. Sorenson, L. Orlo, 1984. "Some Impacts of Rail Regulatory Changes on Grain Industries," 1984 Annual Meeting, August 5-8, Ithaca, New York 279102, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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