Welfare Trade-Offs in U.S. Rail Mergers

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 U.S. 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 U.S. rail freight markets increased by about 30% between 1986 and 2001 despite dramatic industry consolidation, suggesting that to date the Williamson trade-off has favored rail customers. We find that behavior 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.

Number of Pages in PDF File: 31

Keywords: Merger analysis, logit models, differentiated product markets, railroads

JEL Classification: L11, L13, L41, L92

working papers series