Geographic Market Areas and Market Structure in the Bituminous Coal Industry

• Author: Ronald E. Shrieves
• DOI: 10.1177/0003603X7802300305
• Published date: 01 September 1978
• Date: 01 September 1978
• Subject Matter: Article

GEOGRAPHIC MARKET AREAS

AND

MARKET

STRUCTURE

IN

THE

BITUMINOUS

COAL INDUSTRY

by

RONALD

E.

SHRIEVES*

The recent controversy regarding the question of whether

or not the petroleum industry had a role in "contriving" the

energy crisis in order to enhance its own profits dramatizes

the concern for a detailed understanding of energy-related

industries. As such, the bituminous coal industry is receiving

increasing attention from economists.' Of particular interest is

the measure of industry structure known as the concentration

ratio. Both buyer and seller concentration ratios have achieved

places of significance in questions of antitrust policy, particu-

larly in merger cases. However, the need for defining the rele-

vant geographic markets in which buyer or seller concentra-

tion ratios are computed, though well recognized, has gen-

erally been addressed only in a relatively unsophisticated man-

ner, particularly in matters related to the coal industry."

* Associate Professor of Finance, University of Tennessee, Knox-

ville.

AUTHOR'S

NOTE:

Research conducted under NSF grant SIA72-

03525 A04. The author acknowledges support and suggestions from

colleagues in the University of Tennessee Appalachian Resources

Project, and is particularly indebted to Mr. Charles Perkins for

assistance in organizing and processing the large amount of data

supporting this research.

1For example, see the recent report by the Federal Trade

Com-

mission, Concentration Levels and Trends in the Energy Sector

of

the U.s. Economy, aStaff Report by Joseph P. Mulholland and

Douglas W. Webbink, March 1974.

2The FI'C study cited in note 1 simply accepted a definition of

the mid-west coal market as determined in an earlier study by Reed

Moyer. See Competition in the Midwestern Coal Industry, Harvard

Univ. Press, 1964. The FI'C report further stated

that

"no distinct

geographic submarkets within the Eastern region can

be

delineated,"

with the insightful explanatory comment, "Although Pennsylvania

coal obviously does not compete with Tennessee coal, there is no

clear-cut gap in interarea competition

that

would allow the delinea-

589

590 THE ANTITRUST BULLETIN

Delineation of geographic markets for bituminous coal is

also relevant in assessing potential regional impact of competi-

tive forces among alternative fuels, e.g., what areas of the

country

will

be significantly affected by a change in oil prices,

and in questioning the interregional impact of changes in envi-

ronmental standards, for example, how more stringent air

quality standards in Illinois will affect other regions of the

country in terms of availability and cost of coal.

The first objective of this study is to develop appropriate,

reasonably objective criteria for the delineation of geographic

markets, and to apply these criteria to recent data on the bitu-

minous coal industry.

The second objective is to utilize the geographic markets

delineated in a comprehensive assessment of the concentration

aspect of the structure of the bituminous coal industry.

I. DELINEATION OF GEOGRAPHIC

MARKET

AREAS

IN THE

BITUMINOUS COAL INDUSTRY

A. Criteria for Delineation

of

Geographic Markets

ADJUSTED PRICE

The criterion for a geographic market typically presented

in textbooks of economics is generally attributed to Alfred

Marshall. For example, Stigler has defined a market as: "The

area within which the price of a commodity tends to uniform-

ity, allowance being made for transportation cost." Stigler

tion of, say, a north-south dichotomy of the region." Since the first

draft of this study, a study by Hogarty has been published. While

the methodology of this later study is certainly an exception to the

"unsophisticated" efforts referred to, the conclusions reached

through the approach devised herein differ considerably from

Hogarty's. See Thomas F. Hogarty, "The GeographicScope of Energy

Markets; Oil, Gas and

Coal,"

in

T.D.

Duchesneau, Competition in the

U.S. Energy Industry, Ballinger, 1975.

BITUMINOUS

COAL 591

goes on to say: "Since the market is defined by uniformity of

price, its area will be

at

least as large as the larger of the

areas of sellers' competition and buyers' competition, or the

sum of the areas when they partially overlap." Thus, even if

all coal produced in the U.S. were controlled by a monopolist,

we would expect competition among buyers in any geographic

market to result in uniformity of

F.O.B.

mine prices, so long

as the monopolist cannot discriminate among buyers in that

region. Of course, if the monopolist can discriminate among

geographic areas on the basis of differential demand charac-

teristics, then geographic markets would emerge.' Similarly,

suppose a monopsonist operated all utility plants in the coun-

try," then the price paid by the monopsonist for coal delivered

to steam plants in different locations from a given coal pro-

ducing region would differ by no more than the differential

transportation costs of delivery to those plants, since no seller

could exact a higher price due to competition of other sellers

in his proximity (i.e., with similar transportation costs). The

F.O.B.

mine price paid for coal at different consumption loca-

tions might differ if the different locations were served

entirely by different producing regions, but such a phenome-

non would be prima facie evidence for delineation of separate

geographic markets, since the monopsonist is discriminating

among coal suppliers on the basis of differences in supply con-

ditions which can be identified in terms of geographic location

of producers.

3See George J. Stigler, The Theory

of

Price, Macmillan

Com-

pany, 1966, p. 85.

4

It

should be noted that, in interpreting amarket area on the

basis of the degree of competition, Stigler's notion of the Marshal-

lian concept of a market area is at odds with the interpretation

given by others who would argue

that

Marshall's concept of a mar-

ket area depends upon variation of supply and demand forces in a

spatial context only, not on forces attributable to structural configu-

ration of the industry. For example, see Peter O. Steiner, "Markets

and Industries," International Encyclopedia

of

the Social Sciences,

Macmillan and the Free Press, 1968

(Vol.

9, pp. 575-581), and Ken-

neth G. Elzinga and Thomas F. Hogarty, "The Problems of Geo-

graphic Market Delineation in Antimerger Suits," Antitrust Bulletin,