THE EFFECT OF END-TO-END RAILROAD MERGERS ON ECONOMIC WELFARE

An end-to-end railroad merger may cause the merged firm's costs and rates to rise or fall and demand for the merged route to increase as a result of service quality improvements. Therefore, the change in total surplus resulting from such a merger is an empirical issue, not merely a theoretical issue.;Demand and cost functions for specific railroad routes as well as truck and barge transportation are developed in order to implement the model. The likely effect of the CSX and Pacific Rail mergers on total surplus is simulated after assuming three different post-merger pricing policies. In most markets these mergers resulted in significant decreases in shortrun marginal cost and increases in total surplus. In some markets there are declines in both shortrun marginal cost and total surplus or increased shortrun marginal costs and decreased total surplus. The cost increases and surplus decreases are probably overstated.;Assumed pricing behavior had little effect on the change in total surplus. It was estimated that the CSX merger, which involved substantial reductions in shortrun marginal cost, increased total surplus by ;In this study it is assumed that railroads act as regulated oligopolists, while truck and barge lines are unregulated and perfectly competitive. The regulatory assumptions follow the Staggers Act, including maximum rate regulation, revenue division rules, and constraints on the employment of fixed factors. The behavioral assumptions and regulatory constraints are built into a model of the market for surface freight transportation, from which pre-merger equilibrium conditions are derived. The post-merger equilibrium is characterized using a similar model which allows changes in costs, changes in demand, and changes in market size as a result of the merger.