Suggested Citation:
Hughes, Jonathan E. (2009) The Higher Price of Cleaner Fuels: Market Power in the Rail Transport of Fuel Ethanol. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-09-20

This paper provides evidence of market power in the transportation of ethanol used in refor- mulated gasoline and alternative transportation fuels. I estimate a reduced form model for railroad route-level prices. My identi cation strategy instruments for railroad entry, controls for selection and explicitly models capacity constraints. A detailed understanding of this indus- try is important because U.S. energy and environmental policies seek to substantially expand ethanol use. Evidence of market power may alter the types of policies pursued by lawmakers. I nd that ethanol shipment prices fall quickly with increased competition. For the rst entrant, prices fall by 3% of variable cost. For the second entrant, prices fall by 15% of variable cost. I also nd evidence that railroads price discriminate based on environmental regulation at route destinations. Monopolist prices for shipments to carbon monoxide non-attainment areas are 4% higher than shipments to other destinations. This price premium falls sharply with increased competition.