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U.S. vs. Terminal Railroad Association of St. Louis

ECON673
by

Amanda Wei

on 10 March 2014

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Transcript of U.S. vs. Terminal Railroad Association of St. Louis

Vertical Integration
Horizontal Integration
United States v.
Terminal Railroad Association of St. Louis.

Amanda

Marik

Antonio
1874: James B. Eads Bridge was Built (Connecting St. Louis and East St. Louis, Illinois)
1890: The Merchants Bridge was built. (the second crossing of the Mississippi in St. Louis)
First Ever U.S. Supreme Court case (1912) to use the "Essential Facilities Doctrine".
Group of railroad companies that formed the “Terminal Railroad Association of St. Louis” controlled all railway bridges and related facilities.
Supreme Court: 1904-1912
Highlights
1889: 6 railroads that had terminals in St. Louis formed the Terminal Railroad Association of St. Louis.

Conclusion
1886: No concurrent ownership!
The Act of Congress prohibited stockholders in any other railway bridges from becoming a stockholder in the second bridge.
By 1893, the provision of the Act that prevented concurrent ownership of Eads and Merchants Bridge mysteriously “disappeared”
In 1904 the Missouri attorney general brought the case into the supreme court of Missouri by arguing for the dissolution of the merger between the association and the Merchants Bridge.

"Rule of Reason" Court consensus: there were important efficiencies in the merger. The Court refused to dissolve the arrangement.

In 1912,the Court ruled the association to be illegal. The Court ordered the association to permit other railroads to be able to become association members, serve nonmembers on equal terms, and eliminate the Bridge Arbitrary. Otherwise, the Court will call for dissolution of the association.
The Union Railway & Transit Co. of St. Louis and East St. Louis
The St. Louis Bridge Co., and the Tunnel Railroad of St. Louis

The Union Depot Co. of St. Louis

The Terminal Railroad of St. Louis and East St. Louis

The Eads or St. Louis bridge
The great union station
The only existing railroad bridge
Every terminal
company which that bridge could be used by railroads terminating on either side of the river

Terminal Railroad Association properties
The principal defendant is the Terminal Railroad Association of St. Louis. [Group of companies for the express purpose of acquiring the properties of several independent terminal companies at St. Louis with a view to combining and operating them as a unitary system.]
3 following propositions
PROPOSITION 1

A group of railroads constituting
a subset of all railroads entering St. Louis from the West jointly erected a railroad terminal.
PROPOSITION 2

The terminal was the only "feasible" terminal option for rail traffic coming into St. Louis from the East.
PROPOSITION 3

Certain railroads (non-owners of the terminal):
(a) Denied access to the terminal, foreclosing them from competing
(b) Paid higher prices.
Propositions 1 and 2 suggest that the terminal was a natural monopoly owned by vertically integrated firms.
Proposition 2 suggests that the elasticity of technical substitution was low.
ECON673 - Feb 17th 2014
The association had no market power over shipments going from St. Louis to the West.
The association had no market power over shipments from east of the Mississippi to points beyond St. Louis (or vice versa).
Defendant Argument is that association is natural monopoly. The use of the combined facilities of all five companies necessary to get the maximum efficiency to benefit individual customer.
Terminal Railroad case has been consistently misinterpreted, it has served as a source for misbeliefs about the economics of vertical integration.
The case has established “Essential Facilities Doctrine”.
Under current merger standards, antitrust authorities almost certainly would seek to block the merger or to undo it once it occurred. (The anti-competitive problem identified by the court was horizontal.)

Court Decision
Conclusion
Full transcript