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Abstract
This study examines the cost conditions present in the Class I railroad industry. Recent
mergers and merger proposals have brought forth questions regarding the desirability of
maintaining competition in areas impacted by horizontal mergers and, similarly, the desirability
of end-to-end mergers. As we consider the costs and benefits of various merger oversight
policies, it is imperative that we understand the welfare effects of such policies. One essential
element of such welfare effects is the effects on costs within the industry. In examining the cost
conditions in the industry, the study finds that railroads are natural monopolies over current
networks. That is, duplicate networks serving the same railroad markets would result in
increased industry costs. This suggests that maintaining competition in markets impacted by
horizontal mergers is not justified by railroad cost considerations. In examining the potential
cost effects of end-to-end mergers, the study finds evidence to suggest that Class l railroads are
natural monopolies as networks are expanded.