Market power and transportation price formation: Theory and an application to the captive shipper problem

We develop a spatial model of bulk commodity transportation price formation. The spatial transportation price model is first developed for the monopolist carrier. Then the model is extended to quantity-setting and price-setting duopolist carriers under incomplete cross-hauling. Measures developed from the market equilibrium conditions identify whether mill, uniform or discriminatory transportation pricing is the dominant type of price information. Other measures are derived which allow us to differentiate between price-setting and quantity-setting carrier behavior. A Lerner index of the carriers' ability to extract quasi-rents is derived. A modification of the Lerner index specific to transportation prices first proposed by Damus (1981) is also derived.