PERHAPS of utmost importance to the longterm structure and performance of the railroad industry are the large-scale corporate mergers which are currently pending or in the planning stage. Though railroad managers and the Congress have apparently been very enthusiastic about the benefits of rail mergers,' this enthusiasm is not shared in the conclusions of retrospective studies on the topic. For instance, Gallamore (1969) and Sloss, Humphrey and Kruttner (1975) concluded that recent mergers have had little success in achieving anticipated cost savings. Unfortunately, these studies do not shed much light on the social desirability of rail reorganization as they fail to measure the benefits which accrue to shippers through mergerinduced improvements in the quality of rail service. In a recent paper, Levin and Weinberg (1979) used post-merger changes in market shares to measure the effect of mergers. They found that end-to-end mergers did increase the market shares of the firms in the sample, whereas parallel mergers did not. In their analysis, increases in market share are assumed to reflect social benefits; however, as acknowledged by the authors2 and demonstrated by Spence (1975), changes in a firm's performance are not likely to be a sufficient criterion for determining the social value of service quality improvements. In general, an analysis of railroad mergers is complicated by the fact that one is analyzing a network industry. That is, performance in the rail industry (and other network industries such as telecommunications, trucking, and electricity) is generally dependent upon operations by a number of distinct firms which jointly produce the final output. In rail freight transportation, for instance, roughly 70% of total car-miles consists of interline service (i.e., involves two or more carriers). Unfortunately, previous analyses of the rail industry have failed to incorporate two critical features of the industry: the network interdependencies among carriers and links in the network, and the effects of differences in service quality upon users of the rail system. In this paper, we explicitly recognize that rail costs and service quality are significantly affected by market competition and/or coordination among rail carriers. From this perspective, we attempt to estimate the potential consequences of rail mergers, vertical or parallel, respectively. We measure separately two classes of potential effects of rail mergers: the cost savings which might be realized by rail carriers (through increased operating efficiencies and improved capacity utilization) and the improvements in service quality which would potentially accrue to the users of the rail system. In the next section, we identify the economies which can be potentially realized through horizontal and vertical mergers. In section III we develop the framework within which the cost and service-related benefits are estimated and describe our data base. The empirical results are presented and interpreted in section IV. Finally, the implications of the results for public policy toward mergers are discussed in the concluding section.
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Jan 1, 1996
A Garayev + 1
Open Access
