Essays on competition in the freight railroad industry
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This dissertation addresses open issues in complementary goods mergers and tacit collusion as it relates to the freight railroad industry. It provides a broad overview of the freight railroad industry, its leading players, the rate-setting process, and describes dynamics in the markets of different commodities shipped. The standard literature on tacit collusion concentrates on how it influences the pricing of substitutes. However, collusion is also likely to influence the pricing of complements. For example, in static equilibrium, if two local monopolists were selling complementary products, they would charge a higher price than if both products were offered by a single multiproduct monopolist, reducing both the industry profits and the consumer surplus. However, if firms were able to coordinate, they could reach a Pareto improvement by lowering prices to the monopolist level. Therefore, in the markets where firms sell both substitutes and perfect complements, the welfare effect of coordination is ambiguous. The dissertation analyses this question in the context of the US freight railroad industry. Using rail waybill data, I find evidence that prices are higher on average in markets where the route is served jointly by two or more railroads, and thus inefficiency from the pricing of complements is present. I then estimate a structural model where firms set prices a la Bertrand and conduct merger simulations for the firms that sell complements in many markets. I find that mergers are welfare enhancing. They benefit the consumer and merging parties but hurt outsiders. In the last chapter, I estimate a structural model of competition with conduct parameter defined as a function of multimarket contact. I compare industry welfare to the counterfactual of breaking tacit collusion and full monopoly and find that the former is welfare enhancing. The latter reduces the welfare but the effect if smaller in magnitude.