Don’t allow the Union Pacific-Norfolk Southern merger

OPINION:

Any large merger has a trade-off between the potential efficiencies generated by a combined company and the market power it generates. The proposed merger between Union Pacific and Norfolk Southern has been pitched as a triumph of efficiency and modernization while ignoring the market power it creates. The evidence on past cost reductions from similar mergers is rather weak, making the market power it generates more troublesome. As someone who believes passionately in competitive capitalism, I can’t support it.

The Federal Trade Commission standard focuses on how consumers fare with or without a merger. Prices facing consumers are driven by the costs of production and markups of those costs. Therefore, for a given merger, potential price reductions stemming from efficiencies that reduce costs must be weighed against the increased market power that may raise prices. The relative size of the two offsetting forces on prices, rather than their individual absolute sizes, thereby becomes central.

The American economy has thrived for more than two centuries because our markets are open, competitive and disciplined by consumer choice. That’s what drives innovation, productivity, and lower costs. When you remove that discipline — when a handful of big players carve up an industry — you don’t get capitalism; you get cartelization. That’s exactly what this merger threatens to bring to America’s rail system.

On the cost reductions side of the lever, Union Pacific and Norfolk Southern claim their merger will create $2.75 billion in annual “synergies” and greater operational efficiency. Yet history shows that these promised efficiencies rarely materialize. Past railroad mergers, from the 1990s wave that reduced dozens of carriers to the current handful, have led to service breakdowns and higher shipping costs. Shippers and industries such as agriculture and manufacturing still haven’t recovered.

On the market power side of the lever, if this deal goes through, one combined railroad would control nearly half of all U.S. rail freight. That’s not a competitive market; that’s a monopoly corridor stretching from coast to coast. For customers, especially those in the middle of the country who already rely on limited rail options, this would mean fewer routing choices, less leverage in negotiations, and upward price pressure.

We have antitrust laws because free markets work best in consumer interest when businesses are forced to compete. The invisible hand functions because it’s guided by the pressure to serve customers, not regulators or government officials.

What’s particularly troubling is the implications it has for further consolidation. If regulators allow Union Pacific and Norfolk Southern to combine, the other major players, BNSF and CSX, will likely have an incentive to follow suit. Before long, America’s rail network could be reduced to two megasystems controlling virtually all freight movement. That’s not free enterprise; it’s the kind of duopoly that invites regulation, political meddling and economic inefficiency.

Railroads are the arteries of commerce for farmers, miners, energy producers and manufacturers. When those arteries are controlled by one or two corporate entities, every business that depends on them loses negotiating power, which drives upward price pressure from market power.

In addition, there is a risk of regulatory capture, where big firms use their influence to shape the rules in their favor. The Surface Transportation Board, which oversees rail mergers, has the responsibility to act as an impartial referee. It must not become a rubber stamp for increased market power. We’ve seen too many examples in recent years of government being swayed by the largest and richest firms.

A better path for the rail industry, and for American commerce, is competition through performance, not consolidation. Railroads should win business by providing better service, faster delivery and more reliable logistics. Capitalism thrives when markets are open, power is decentralized and consumers, not bureaucrats, decide who wins and loses. The Union Pacific-Norfolk Southern merger would move us in the opposite direction: toward concentration, dependency and less dynamism. That’s not pro-market; it’s anti-market.

• Tomas Philipson is a former acting chairman of the Council of Economic Advisers under President Trump and the Daniel Levin chair in public policy at the University of Chicago.