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Merger idea... CP+IC&E+DM&E+KCS
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[quote]QUOTE: <i>Originally posted by Murphy Siding</i> <br /><br />Future Model: I wouldn't doubt that Midwest power entities would welcome the thought of the third railroad shipping from the PRB. It's unclear if any of them have actually backed this project. ( As in "put your money where your mouth is"). But, please explain how having 3 railroad choices is going to be any more competitive than 2 ? Also. isn't the DM&E, with 2 billion dollars in new debt going to have a harder time "being competitive" than 2 existing lines with a lot lower overhead costs? <br />[/quote] <br /> <br />It's about control. By having a stake in the DM&E expansion, the utilities can exert some influence in the ways and means of coal delivery. It therefore doesn't matter if there is suddenly "too much compeitition" because if push comes to shove the utilities have DM&E's back. Naturally this begs the question "why not just buy into BNSF or UP?". Because the purchase price for having sufficient say in matters is cheaper with the smaller domestically owned DM&E than with the multinational corporations like BNSF and UP. That doesn't mean that these utilities won't drop DM&E like a rock if BNSF or UP come up with a long term "sweetener" deal. <br /> <br />BTW, the $2 billion doesn't necessarily imply debt, a good part of that could be equity. <br /> <br />As for 3 choices being better than 2, I read an economic analysis on monopolies in which they rated the degree to which the monopolists prices compared with true competitive prices. For monopolists, it was something like an 86% average price differential. For duopololists, it was around 60%. However, for triopolists the price differential was only a few percentage points difference, something like 16% at most if I remember correctly, and as such it was determined that there was no statistically significant difference between triopoly pricing and true competitive pricing. Thus, assuming the utilities would go for whoever offered the lowest shipping price regardless of ownership alliances, they would have a nearly competitive transport market from which to choose. How this would fly against the railroad stand (or is it a railroad myth?) that they need revenues of 150% or so of variable costs to be judged "profitable", is not something to which I have the relevent insider information, so it's hard to say if railroading could survive in a triopoly environment or not.
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