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

Abstract

Abstract While there have been many studies of the impact of railroad deregulation on agricultural transportation markets there have been very few that address the impact of railroad mergers on rail grain prices and the distribution of efficiency gains. The purpose of this paper is to add to the sparse literature regarding the effect of railroad mergers on agricultural transportation markets. Given the ever declining number of Class I railroads, this research is very timely. The specific objectives of the research are as follows: (1) Analyze the impact 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) merger on the ability of the UPSP to increase prices on movements of Kansas wheat 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 wheat logistics system is used to identify the least cost transportation routes from the Kansas study area to the market at Houston, Texas. A profit improvement algorithm is developed to measure the amount by which 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 only slight advantages in cost relative to other railroads that serve the same areas as the merged railroads. Wheat shippers benefit from merger-induced reductions in transportation and handling costs. Shippers are likely to capture a significant share of these cost reductions since intrarailroad competition is present after the mergers. Transport cost reductions accompany mergers due to more direct routing of wheat shipments and the assumption that the merged railroad operates at the costs of the lower cost partner.