The impact of railroad mergers on grain transportation markets: a Kansas case study

While there have been many studies of the impact of railroad deregulation o n agricultural transportation markets there have been very few that address the impact of railroad mergers on rail grain prices and the distribution o f efficiency gains. The purpose of this paper is to add to the sparse liter ature regarding the effect of railroad mergers on agricultural transportati on markets. Given the ever declining number of Class I railroads, this rese arch is very timely. The specific objectives of the research are as follows: (1) Analyze the imp act of the Burlington Northern (BN)-Santa Fe (SF) merger on the ability of the BNSF to increase prices on movements of Kansas wheat to Houston, Texas. (2) Analyze the impact of the Union Pacific (UP)-Southern Pacific (SP) mer ger on the ability of the UPSP to increase prices on movements of Kansas wh eat to Houston, Texas. (3) Analyze changes in Kansas wheat logistics system costs as a result of the BN-SF and UP-SP mergers. Two models are developed to achieve the objectives of the study. A network model of the wheal logistics system is used to identify the least cost tran sportation routes from the Kansas study area to the market at Houston, Texa s. A profit improvement algorithm is developed to measure the amount by whi ch railroads can raise their prices above variable cost. The BNSF and UPSP achieve only minor increases in market power (measured by the ratio of revenue to variable cost) because the merged railroads have o nly slight advantages in cost relative to other railroads that serve the sa me areas as the merged railroads. Wheat shippers benefit from merger-induce d reductions in transportation and handling costs, Shippers are likely to c apture a significant share of these cost reductions since intrarailroad com petition is present after the mergers, Transport cost reductions accompany mergers due to more direct routing of wheat shipments and the assumption th at the merged railroad operates at the costs of the lower cost partner. (C) 1999 Elsevier Science Ltd. All rights reserved.