Market Power and its Determinants in the Chinese Railway Industry

Abstract

This study measures the market power of China’s national railway operator and analyzes its contributing and determining factors. A newly-developed stochastic frontier method is used to estimate the Lerner indexes of the operator’s 18 regional railway bureaus from 1995-2014. A regression is then conducted on these indexes to identify the determining factors of market power in this industry and explain any regional heterogeneity. We find that China’s monopoly operator of rail transportation has an overall positive Lerner’s index signifying that it exercises significant market power. We further find that obvious regional heterogeneity in market power exists among the railway bureaus. For example, railway bureaus in Eastern China typically have the highest Lerner index scores possibly owing to greater regional rail traffic and demand. We learn that China’s dramatic high-speed rail (HSR) development in recent years appears to have no effect on the market power of the rail operator. Finally, we propose continued railway market deregulation, especially a series of price liberalizations in recent years, may provide railway bureaus with more autonomy to exert their market power, widening observable heterogeneity.