Pricing of Complements in the U.S. Freight Railroads: Cournot Versus Coase

U.S. Department of Justice, Antitrust Division, Economic Analysis Group Discussion Paper EAG 18-1

Georgetown McDonough School of Business Research Paper No. 3165072

30 Pages Posted: 4 May 2018

See all articles by Alexei Alexandrov

Alexei Alexandrov

Independent

Russell W. Pittman

U.S. Department of Justice - Economic Analysis Group; Kyiv School of Economics; New Economic School (NES)

Olga Ukhaneva

Georgetown University - Center for Business and Public Policy

Date Written: April 3, 2018

Abstract

Monopolists selling complementary products charge a higher price in a static equilibrium than a single multiproduct monopolist would, reducing both the industry profits and consumer surplus. However, firms could instead reach a Pareto improvement by lowering prices to the single monopolist level. We analyze administrative nationally-representative pricing data of railroad coal shipping in the U.S. We compare a coal producer that needs to ship from A to C, with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We do not find that price in case (2) is higher than price in case (1), suggesting that the complementary monopolist pricing inefficiency is absent in this market. For our main analysis, we use a specification consistent with the previous literature; however, our findings are robust to propensity score blocking and machine learning algorithms. Finally, we perform a difference-in-differences analysis to gauge the impact of a merger that made two routes wholly-owned (switched from case 2 to case 1), and these results are also consistent with our main findings. Our results have implications for vertical mergers, tragedy of the anticommons, mergers of firms selling complements, and royalty stacking and patent thickets.

Keywords: Pricing of Complements, Vertical Mergers, Cournot, Coase, Railroads

JEL Classification: D21, D22, D43, D86, L13, L14, L40, L92

Suggested Citation

Alexandrov, Alexei and Pittman, Russell and Ukhaneva, Olga, Pricing of Complements in the U.S. Freight Railroads: Cournot Versus Coase (April 3, 2018). U.S. Department of Justice, Antitrust Division, Economic Analysis Group Discussion Paper EAG 18-1; Georgetown McDonough School of Business Research Paper No. 3165072. Available at SSRN: https://ssrn.com/abstract=3165072 or http://dx.doi.org/10.2139/ssrn.3165072

Alexei Alexandrov

Independent

No Address Available
United States

Russell Pittman (Contact Author)

U.S. Department of Justice - Economic Analysis Group ( email )

450 5th St. NW
Antitrust Division
Washington, DC 20530
United States
202-307-6367 (Phone)
202-307-3372 (Fax)

Kyiv School of Economics ( email )

vul. Yakira, 13, 3d floor, suite 334
Kyiv, 04119
Ukraine

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

Olga Ukhaneva

Georgetown University - Center for Business and Public Policy ( email )

Washington, DC 20057
United States

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