Simulating the effects of railroad mergers

The purpose of this paper is to add to the empirical literature regarding m erger simulation analysis by examining the effect of railroad mergers on ra ilroad market power. This is done by measuring railroad profits and revenue /variable cost ratios corresponding to different degrees of intrarailroad c ompetition 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 tran sportation routes from the Kansas study area to the market at Houston. A pr ofit improvement algorithm, which identifies Nash equilibrium prices, is de veloped 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 rail road market power or make railroad shippers worse off. Instead, the study d emonstrates that the impact of railroad mergers on shippers and railroads d epends on factors that vary geographically, such as the degree of intrarail road and intermodal competition in the area.