Should upstream merger be regulated in a railway system with monopolistic operator

This study examines the impact of the merger of two upstream manufacturers on the railway system performance, including quality of service, pricing, profits and consumer surplus. Two scenarios of analysis are investigated, and the equilibrium solutions for quality and price of service are derived, respectively. Experimental analysis shows that the upstream merger of the manufacturers leads to higher price of service and industry profit, but lower quality of service and consumer surplus. The results suggest that there exists a tradeoff between industry profit and consumer surplus to the policy maker, who should regulate the merger and prevent the railway system from drastically lowering quality of service.