Other Reports

Railroad Cost Considerations and the Benefits/Costs of Mergers

  • 01
  • Sep
  • 1997
AUTHOR: John D. Bitzan
OFFICE: RPD
REPORT NUMBER: 97-80
SUBJECT: Evaluation
KEYWORDS: Oversight Policies, Economic Analysis, Cost/Benefit Analysis
ABSTRACT: This study examines the cost conditions present in the Class I railroad industry. Recent mergers and merger proposals have brought forth questions regarding the desirability of maintaining competition in areas impacted by horizontal mergers and, similarly, the desirability of end-to-end mergers. As we consider the costs and benefits of various merger oversight policies, it is imperative that we understand the welfare effects of such policies. One essential element of such welfare effects is the effects on costs within the industry. In examining the cost conditions in the industry, the study finds that railroads are natural monopolies over current networks. That is, duplicate networks serving the same railroad markets would result in increased industry costs. This suggests that maintaining competition in markets impacted by horizontal mergers is not justified by railroad cost considerations. In examining the potential cost effects of end-to-end mergers, the study finds evidence to suggest that Class I railroads are natural monopolies as networks are expanded.
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