"Railroads can't maintain pace of coal demand"

[jeffhergert]

  When the DME first started talking about building into the PRB, the CN (according to fan newsletters/magazines) stated that if DME built it, they would upgrade the ex-IC line from Waterloo/Cedar Falls area up to Glenville, MN (where they got on the UP to access Albert Lea, MN) to handle coal trains.  This was before DME bought the IMRL lines and formed the ICE.

  I believe the only reason DME formed ICE was to access Chicago, and to a lesser extent, Kansas City for interline coal moves. 

  If I understand correctly, over the years there has been so many plans proposed hard to remember what's what, but isn't the DME building primarily into a region of the PRB where new mines have been planned, but not yet openned?  If this is true, then some of DME's traffic will depend on these new mines getting contracts, not just the DME's rate for movement.

Jeff     

[arbfbe]

The last time I was in Winonna I also noted there is no longer a bridge at the location either.  Interchange will have to take place somewhere north of Kansas City or there in to a location south of Chicago.  I am not familiar with the ICE to eastern railroads interchange points which could handle coal trains.

If the DM&E is successful on gathering a coal haul from the PRB to a coal plant currently served by the BNSF or UP there will have to be a interchange rate for the DME/BNSF haul.  You can bet the farm on the idea the joint rate for the move will ALWAYS cost the customer more than the straight line haul on the BNSF.  What ever value the DM&E is willing to discount the rate will simply be added to the BNSF portion of the rate split.  Their best chance will be for new business rather than stealing existing routes.  The UP and BNSF will be lengthening contract rates with as many customers as possible to keep them from even talking to the upstart. 

[Anonymous]

You guys forget - many of those PRB coal customers are in the East, served mostly by NS and CSX, maybe some CN and CP as well.  As long as DM&E has direct interchange with those eastern railroads, they can cut into UP/BNSF's duopoly.

 

Probably the best argument yet for DME to avoid Rochester altogether, and target Chicago for their end of line  terminus

 

I don't think  either NS nor CSX serve Winona 

[Anonymous]

  In other words, if UP is currently gouging a shipper, and that shipper suddenly has access to DM&E, it seems that UP would have to price themselves a little more appropriately to avoid having DM&E take away the business.

 

 

Just my opinion of course, but I think you have a point.  But how much luck a small fry such as DME would have employing that in their favor remains a question.

 

UP/BNSF would likely just onchestrate some rate stucture that abused DME even worse. Under some high sounding description such as "discounted innerchange rate structure for volume partners" that would in essence translate to "DME, you are screwed" or similar . Yes I am cynical

 

[Anonymous]

I will admit to having another one of these periods of confusion.  Why would normal interchange not apply here?  Why would DM&E be restricted in the size of their delivery area?  If a shipper is serviced by DM&E, cannot that shipper ship product to any end location?

Just how much success would you expect DME to have in undercutting the price of either road that could HANDLE  THE MOVEMENT EXCLUSIVELY on it's own rails? 

Okay, but wouldn't the threat of DM&E taking away such a customer still cause BNSF or UP to maintain fairly tight pricing for that customer?  In other words, if UP is currently gouging a shipper, and that shipper suddenly has access to DM&E, it seems that UP would have to price themselves a little more appropriately to avoid having DM&E take away the business.

Anway, I do see your point that it probably is not likely for DM&E to take away business that is travelling to UP or BNSF destinations.  But my reading of the original post made it sound as though DM&E would be unable to deliver to those destinations.  Perhaps I was over-reading it. 

You guys forget - many of those PRB coal customers are in the East, served mostly by NS and CSX, maybe some CN and CP as well.  As long as DM&E has direct interchange with those eastern railroads, they can cut into UP/BNSF's duopoly.

[Datafever]

I will admit to having another one of these periods of confusion.  Why would normal interchange not apply here?  Why would DM&E be restricted in the size of their delivery area?  If a shipper is serviced by DM&E, cannot that shipper ship product to any end location?

Just how much success would you expect DME to have in undercutting the price of either road that could HANDLE  THE MOVEMENT EXCLUSIVELY on it's own rails? 

Okay, but wouldn't the threat of DM&E taking away such a customer still cause BNSF or UP to maintain fairly tight pricing for that customer?  In other words, if UP is currently gouging a shipper, and that shipper suddenly has access to DM&E, it seems that UP would have to price themselves a little more appropriately to avoid having DM&E take away the business.

Anway, I do see your point that it probably is not likely for DM&E to take away business that is travelling to UP or BNSF destinations.  But my reading of the original post made it sound as though DM&E would be unable to deliver to those destinations.  Perhaps I was over-reading it. 

[Anonymous]

I will admit to having another one of these periods of confusion.  Why would normal interchange not apply here?  Why would DM&E be restricted in the size of their delivery area?  If a shipper is serviced by DM&E, cannot that shipper ship product to any end location?

 

I'm just guessing, but I think he had a very good point.

 

What I think he is saying is that even if DME takes marketshare from BNSF/UP by undercutting their prices, that's not going to do them a lot of good for the instances where the end customer is on a BNSF/UP line

 

for example, lets say the end customer is in Texas, and DME is forced to innerchange with one of the other 2 to reach the destination.

 

Just how much success would you expect DME to have in undercutting the price of either road that could HANDLE  THE MOVEMENT EXCLUSIVELY on it's own rails? 

 

 

[Anonymous]

 

 

Regarding this business of taxpayer subsidy, CAN WE REMEMBER THAT IS A LOAN?

 

it is an artificially cheap loan, therefore a subsidy exists .

They probably couldn't borrow money of this magnitude anywhere else  period, but certainly not so inexpensively, given the amount of risk, etc.

 

And, should the undertaking fail, then the whole shebang ends up having been a subsidy. 

 

[Datafever]

One thing to keep in mind here is the DM&E will only provide competition with the BNSF and UP for a limited number of mines and power plants.  The mines they serve will be limited to the number of lines to specific load outs they elect to service with new construction.  The power plants served will be limited to plants online the DM&E and ICE.  To those customers you can add plants online connecting railroads such as CP, CN, KCS, CSX and NS.  DM&E is not just going to cross the Wyoming state line and suddenly obtain access to all the PRB suppliers and all the UP and BNSF customers especially those in TX and OK.  I note there are limited, if any,  customers burning PRB coal on the DM&E proper right now.  The C&NW was not hauling coal on the line before so no power companies could construct a massive power plant on the line and expect service.  There are coal fired generating plants on the ICE lines but certainly not enough to support a line to the PRB as projected by the DM&E.

... 

I will admit to having another one of these periods of confusion.  Why would normal interchange not apply here?  Why would DM&E be restricted in the size of their delivery area?  If a shipper is serviced by DM&E, cannot that shipper ship product to any end location?

[daveklepper]

Suppose the D&ME has some commitments already?

 

But possibly I am just one sad case where after years of tracks being ripped up I take some joy in the likelyhood of tracks be put down.     "Guilty as charged?"

[arbfbe]

One thing to keep in mind here is the DM&E will only provide competition with the BNSF and UP for a limited number of mines and power plants.  The mines they serve will be limited to the number of lines to specific load outs they elect to service with new construction.  The power plants served will be limited to plants online the DM&E and ICE.  To those customers you can add plants online connecting railroads such as CP, CN, KCS, CSX and NS.  DM&E is not just going to cross the Wyoming state line and suddenly obtain access to all the PRB suppliers and all the UP and BNSF customers especially those in TX and OK.  I note there are limited, if any,  customers burning PRB coal on the DM&E proper right now.  The C&NW was not hauling coal on the line before so no power companies could construct a massive power plant on the line and expect service.  There are coal fired generating plants on the ICE lines but certainly not enough to support a line to the PRB as projected by the DM&E.

The BNSF and UP are going to examine the customers the DM&E is likely to cherry pick from their customer list and work to protect those plants from DM&E incursion.  I would expect these plants will be offered some really attractive long term contracts before the DM&E does cross the border to dry up shipping opportunities available to the triopoly upstart.  The DM&E is going to be skating on some mighty thin ice for a long time to come.  The big boys will not be playing nice either. 

[Anonymous]

Nuccor and Toyota come immediately to mind.

Nucor.

[Anonymous]

I noticed on the Northwestern University Transportation site today that there was a recent (12/08) presentation relevant to the topic of this thread. Anyone here attend these things? "Coal Transportation Issues and Opportunities" http://transportation.northwestern.edu/programs/sandhouse/index.html

[Datafever]

Regarding this business of taxpayer subsidy, CAN WE REMEMBER THAT IS A LOAN?

And therefore, as AG has pointed out, deserves the same scrutiny as any other loan.

Personally, I have no opinion one way or the other as to whether DM&E should get the loan or not.  I don't feel that DM&E will significantly impact BNSF's or UP's revenues in the long run.

[daveklepper]

Just one point.   Despite open BNSF opposition and probably some hidden UP opposition as well, once the new line is hauling coal and making money, the BNSF and UP will treat it like they treat each other or any other railroad competitor.   That is the nature of the railroad business.   And so in emergencies they handle each others freight to the extent practical without seriously impacting their own operations.

 

Regarding this business of taxpayer subsidy, CAN WE REMEMBER THAT IS A LOAN?

[Datafever]

 

Okay, let me interrupt you here for a minute.  Where did this particular concept of open access come from? 

From studying the whole gamut of multimodal transportation.  As I have pointed out in defense of OA for the NA rail network, every other transportation mode in NA is open access to some degree, including pipelines and transmission.  Outside of NA, most railroads are either government owned integrated lines, or are (or are moving toward) OA in various forms, both private and public.

Even in NA, the government of Mexico still owns the ROW's of it's recently privatized railroads.

I personally think that a more realistic version of OA here in the US (considering that we have a corporate environment that is decidedly different than almost any other country) is one that primarily consists of trackage rights and terminal rights.  Granted, that isn't the same as complete open access, but it would provide competition.  That competition may consist of only one other railroad for many terminal areas, but it would be competition nonetheless. 

[Anonymous]

 

Okay, let me interrupt you here for a minute.  Where did this particular concept of open access come from? 

From studying the whole gamut of multimodal transportation.  As I have pointed out in defense of OA for the NA rail network, every other transportation mode in NA is open access to some degree, including pipelines and transmission.  Outside of NA, most railroads are either government owned integrated lines, or are (or are moving toward) OA in various forms, both private and public.

Even in NA, the government of Mexico still owns the ROW's of it's recently privatized railroads.

 

[MichaelSol]

Michael-

In cases were a smaller competitor enters a territory served by two well established larger companies, does the third competitor usually cut corners on equipment and employee training ? 

One of the articles cited above, Efficiency, Corporate Power, and the Bigness Complex, Walter Adams; James W. Brock, The Journal of Economic Education, Vol. 21, No. 1 (Winter, 1990), looks at several examples in well-known industries of the diseconomies of scale and where it has fallen to the smaller companies or entrants to do just about everything better than the established "giants." Nuccor and Toyota come immediately to mind.

Kent Healy's landmark study on railroads found greater economic efficiency and better financial returns correlated with the smaller, not the largest, railroad companies of his era.

Adams and Brock spend some time recounting the "merger" era of steel companies -- which coincided with the similiar era, generated by the same thinking, of railroads -- and how each merged company became less, not more efficient, and one-by-one falling into bankruptcy. Like railroading, that industry was handicapped by its own conventional wisdoms about itself -- finally conceding that it could not compete on price with imports, then could not compete on quality and price. The kind of voices that spoke knowledgeably in that industry, and doomed it, carry the same water in the same pails for the rail industry today.

Then Nuccor began shipping steel to Japan -- winning market share based on both quality and price -- at a tenth the size of mighty U.S. Steel.

Size is a handicap. As one GM president remarked, "Chevrolet is such a big monster that you twist its tail and nothing happens at the other end for months and months. It is so gigantic that there isn't any way to really run it. You just sort of try to keep track of it."

Union Pacific conceded this in 1998 when it broke itself into three operating regions. "We thought our centralized system would work, but it turned out to be too complex,'' Union Pacific Chairman Dick Davidson acknowledged. [AP, August 19, 1998].

 

[Datafever]

As most folks on this forum know, I favor open access as the optimal way to achieve the highest social benefit from the railroad genre.  Under open access, you have one entity controlling the tracks (either a government, a public-private consortium, or a private entity under the auspices of utility regulation) and any number of entities providing the transporter services depending on willingness to engage.

Okay, let me interrupt you here for a minute.  Where did this particular concept of open access come from?  I can't say that I've run across this anywhere - the part about the infrastructure being separated from the transporter services.  It wasn't a part of the US legislative bills that I have seen.  I can't recall seeing anything like that on the CURE website.  I understand that some foreign countries may operate that way, but...

 

However, sans OA and maintaining the integrated model, in my view the next best thing is to have at least 3 railroads in most every major terminal or freight producing area.  Triopoly seems to provide the minimum amount of competition to keep consumer pricing at a "doable" limit, while probably being the practical limit to overbuilding.

Quite frankly, I would have to say that in most situations, having three separate infrastructures into each terminal area (and I don't mean running throughout the terminal area, but just to a point capable of servicing the terminal area - which point could be different for each of the three Class 1 carriers) seems to be quite a bit of overbuilding except in certain cases.  The relatively wide open western states could probably support this much better than the density constrained eastern states.

 

In some places, two railroads seem to provide the right balance between consumer pricing and infrastructural optimization.  I would expect that in some situations modal competition from barges (including truck/barge combo moves) provides a similar outcome as three land locked railroads.

How about for moves less than 500 miles?  less than 200 miles?  Does distance play into the ability of other modes of transportation to provide a significant level of competition? 

[Anonymous]

 

In point of fact, I highly suspect that futuremodal is correct in his assertion that triopolies tend more toward fully competitive pricing than duopolies do.  But more to the point, are there particular industries where this is more likely to be so, or conversely, are there industries that are relatively resistant to "price war" pricing regardless of the number of competitors? 

Data,

I feel I should go back a few steps and let you know where this triopoly = social benefit idea comes from.

As most folks on this forum know, I favor open access as the optimal way to achieve the highest social benefit from the railroad genre.  Under open access, you have one entity controlling the tracks (either a government, a public-private consortium, or a private entity under the auspices of utility regulation) and any number of entities providing the transporter services depending on willingness to engage.

However, sans OA and maintaining the integrated model, in my view the next best thing is to have at least 3 railroads in most every major terminal or freight producing area.  Triopoly seems to provide the minimum amount of competition to keep consumer pricing at a "doable" limit, while probably being the practical limit to overbuilding.

In some places, two railroads seem to provide the right balance between consumer pricing and infrastructural optimization.  I would expect that in some situations modal competition from barges (including truck/barge combo moves) provides a similar outcome as three land locked railroads.

[Datafever]

Yes, you did provide that information.  However, that was not a study that supported futuremodal's assertion of a further 16% decrease in prices as the result of the addition of a third competitor (over and above the decrease of prices from adding a competitor to a monopoly).  And I had presumed from your statement that there were several studies that addressed this specific issue.

What you quote specifies a price decrease of 18% in going from a monopoly to a duopoly.  That does not lead me to believe that an additinoal 16% could be garnered from an additional player in the mix.

Notwithstanding all of that, the study is really confusing.  It begins my stating that competition will result in price decreases and then it uses as an example a study that shows that prices increases will be modest after deregulation.  How does that provide empirical support for the original hypothesis? 

[MichaelSol]

Well, and I guess I thought I had provided a study directly on point, as specific to the topic of pricing as I am aware. Perhaps I misunderstand what you mean by "pricing":

"Conventional economic theory argues that an increase in intrarailroad competition will result in a decrease in railroad price. There is substantial empirical support for this hypothesis. For example, Levin (1981b) found that hypothetical railroad price increases resulting from railroad deregulation are quite modest in the presence of a moderate degree of intrarailroad competition.  Levin (1981a) discovered that for various assumptions regarding railroad demand elasticity and railroad revenue/variable cost ratios, the social benefit (net reduction in deadweight loss) of adding an equal-sized railroad competition to a monopoly railroad market ranges from 6.8% to 18.9% of revenues in that market. Adding a third railroad in a two-firm railroad market yields social benefits of 2.4%-6.8% of revenues in that market.  MacDonald (1987) found that increased intrarailroad competition results in lower railroad grain prices. He found that movement from a railroad monopoly to a duopoly with equal-size firms leads to an 18% decrease in railroad corn prices."

Park, Babcock, Lemke and Weisman, "Simulating the Effects of Railroad Mergers," Southern Economic Journal, 2001, 67(4), 938-953, 941. 

The Bibliography at the end of that article cites 34 sources. In turn, that specific article has been cited in 14 other studies on duopoly and triopoly situations. 

 

[nanaimo73]

Michael-

In cases were a smaller competitor enters a territory served by two well established larger companies, does the third competitor usually cut corners on equipment and employee training ? 

[Datafever]

So, futuremodal, what I hear you saying is that there is really very little in the way of hard studies done on triopolies vs duopolies. 

There are tons of studies. Here's a few:

... 

That's a nice list of studies, Mr.s Sol.  Unfortunately, I do not have ready JSTOR access, although I can find inventive ways to access summaries.

Do you suppose you would be capable of limiting your list to just those studies that actually focus on duopoly vs triopoly pricing?  Studies that only have incidental references to triopolies are really not that germane. 

Well, take the first article. Says "duopoly," right. If you actually read it, it is about the strategic hurdles faced by the third entrant into a duopoly situation -- the actual formation of a triopoly.

...

I appear to have stated myself poorly again.  Ah well.  The issue at hand is duopoly vs triopoly pricing.  None of the studies that you just provided an overview for seemed to be focused on that aspect of triopolies.  The formation of triopolies or their merger to duopolies may be fascinating reading, but that doesn't address the pricing questions.

In point of fact, I highly suspect that futuremodal is correct in his assertion that triopolies tend more toward fully competitive pricing than duopolies do.  But more to the point, are there particular industries where this is more likely to be so, or conversely, are there industries that are relatively resistant to "price war" pricing regardless of the number of competitors? 

While this hardly qualifies as a completely valid example, one industry that comes to mind would be the jewelry business.  Jewels tend to have an extremely high markup regardless of the number of jewelry stores in the area.  Competition seems to do nothing to reduce the price of a diamond, even though the retail stores purchase their diamonds at significantly reduced prices from what they are selling them for.  I.e. 100% markups are fairly common. 

[MichaelSol]

So, futuremodal, what I hear you saying is that there is really very little in the way of hard studies done on triopolies vs duopolies. 

There are tons of studies. Here's a few:

... 

That's a nice list of studies, Mr.s Sol.  Unfortunately, I do not have ready JSTOR access, although I can find inventive ways to access summaries.

Do you suppose you would be capable of limiting your list to just those studies that actually focus on duopoly vs triopoly pricing?  Studies that only have incidental references to triopolies are really not that germane. 

Well, take the first article. Says "duopoly," right. If you actually read it, it is about the strategic hurdles faced by the third entrant into a duopoly situation -- the actual formation of a triopoly.

The second article offers an in-depth look at corporate behaviors in a genuine triopoly -- which the authors see as the minimum correlation in that instance between product quality and product quantity in a consumer industry.

Article three is an interesting one -- price boards for wheat that represent oligopolies domestically, but duopolies and triopolies internationally.

The fourth, Spatial Competition Revisited looks at the competitive effects of companies with fixed locations -- much like railroads -- and how they interact on price, and the effects on a fixed location duopoly by the entry of a third firm creating what the author calls "location instability."

The fifth, Horizontal Shareholding Interlocks, discusses how interlocking shareholder interests can be used to bypass antitrust restrictions and even while avoiding duopoly and triopoly forms, essentially create cartels -- an oligopoly of several firms.

The sixth, Monopolization by Sequential Acquisition, looks at the strategy of an owner of a company in a triopoly attempting to obtain duopoly benefits by buying out one of his competitors, and the effect of that on the remaining competitor -- who inherents the duopoly profits, increasing the value of the firm. Under what conditions can either of the duopolists buy out the other to create a monopoly?

The seventh, Economies of Scale, Natural Monopoly, and Imperfect Competition in an Experimental Market, describes a specific experiment in which participants emulated behaviors that resulted in monopoly, dujopoly, triopoly or other models.

Democracy and Duopoly: A Comparison of Analytical Models discusses political parties in the US on the basis of a duopoly analysis -- and the difficulty of creating a triopoly or more, but the probable social benefits in doing so. Probably more intuitive for the non-economists as a view on what a duopoly does to choices and to the "companies" making the "product."

Well, that's the first eight. Notwithstanding the titles in some instances, each of the remaining articles discusses duopoly and triopoly behaviors as the duopoly/triopoly threshold is where organizational behaviors generally undergo a radical transformation, and where societal benefits often shift dramatically.

I suppose I "would be capable" of limiting my list. In fact, I did just that. These were articles I happened to be familiar with. I am sure a literature search would generate a far, far larger list of relevant articles.

My point, however, was broader. Your assertion that the literature is sparse on the matter was misleading. It is, in fact, quite a fertile area of research, commentary and debate and has been for decades. As I attempted to caution earlier, to no effect, the Internet is not always a useful tool for genuine scholarly research.

 

[Datafever]

So, futuremodal, what I hear you saying is that there is really very little in the way of hard studies done on triopolies vs duopolies. 

There are tons of studies. Here's a few:

... 

That's a nice list of studies, Mr.s Sol.  Unfortunately, I do not have ready JSTOR access, although I can find inventive ways to access summaries.

Do you suppose you would be capable of limiting your list to just those studies that actually focus on duopoly vs triopoly pricing?  Studies that only have incidental references to triopolies are really not that germane. 

[MichaelSol]

So does anyone here have a University of Montana student account?

Ha! While I am trying hard to be retired without much success at it, I still teach a class once in a while, mainly just to keep my faculty account available for research purposes.

Some interesting articles there. Efficiency, Corporate Power, and the Bigness Complex, Walter Adams; James W. Brock, The Journal of Economic Education, Vol. 21, No. 1 (Winter, 1990), pp. 30-50 is a nice overview of oligopolies and even trioplies and how they failed -- includes an interesting coverage of diseconomies of scale which dovetails nicely with our recent thread discussion about Kent Healy's views on diseconomies of scale in the rail industry. Nice commentary on the politics of big corporations as well.

 

 

[Anonymous]

So, futuremodal, what I hear you saying is that there is really very little in the way of hard studies done on triopolies vs duopolies. 

There are tons of studies. Here's a few:

Duopoly with Differentiated Products and Entry Barriers, Kofi O. Nti; Martin Shubik, Southern Economic Journal, Vol. 48, No. 1 (Jul., 1981), pp. 179-186

Product Assortment in a Triopoly, Steven M. Shugan Management Science, Vol. 35, No. 3 (Mar., 1989), pp. 304-320

The Elimination of the Canadian and Australian Wheat Boards: A Move from Triopoly to Perfect Competition in the World Wheat Market, Gregory William DeVos, American Journal of Agricultural Economics, Vol. 79, No. 5, Proceedings Issue (Dec., 1997), pp. 1742-1748

Spatial Competition Revisited, B. Curtis Eaton, The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 5, No. 2 (May, 1972), pp. 268-278

Horizontal Shareholding Interlocks, David Flath, Managerial and Decision Economics, Vol. 13, No. 1 (Jan., 1992), pp. 75-77

Monopolization by Sequential Acquisition, Morton I. Kamien; Israel Zang, Journal of Law, Economics, & Organization, Vol. 9, No. 2 (Oct., 1993), pp. 205-229

Economies of Scale, Natural Monopoly, and Imperfect Competition in an Experimental Market, Charles R. Plott; Alexandre Borges Sugiyama; Gilad Elbaz, Southern Economic Journal,  Vol. 61, No. 2 (Oct., 1994), pp. 261-287

Democracy and Duopoly: A Comparison of Analytical Models,

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