Market power and its determinants in the Chinese railway industry

Abstract

This study measures the degree of market power of China’s railway operator and analyzes its 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 to 2014. Regressions are 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 railway operator exercises significant market power with an overall positive Lerner index. Furthermore, obvious regional heterogeneity in market power exists among the railway bureaus. Railway bureaus in Eastern China typically have the highest Lerner index scores, owing probably to greater regional rail demand and/or the economies of traffic density in rail operation. We find that China’s dramatic high-speed rail development in recent years appears to have no effect on the overall market power of the rail operator. On the other hand, 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 observed heterogeneity.