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Benchmark Regulation of Multiproduct Firms: An Application to the Rail Industry

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  • Wesley W. Wilson
  • Frank A. Wolak

Abstract

A number of formerly regulated multiproduct industries have a transitional or permanent residual regulatory mandate to protect consumers from "excessive" prices. The legislation that deregulated most rail rates contains a statutory mandate for the regulator to protect shippers from "excessive" prices. Fulfilling this mandate has been challenging because of the cost and administrative burden to shippers in obtaining regulatory relief. Moreover, as argued by Wilson and Wolak (2016), the existing rate relief mechanism is based on a cost concept that does not reflect the actual incremental cost of a shipment and it does not adequately address the question of what constitutes an "excessive" rate for a multiproduct firm with significant common costs. This paper analyzes a benchmark price approach to identifying "excessive" prices in multiproduct industries subject to residual price regulation. Our empirical analyses demonstrate how the mechanism can be used to fulfill the statutory mandate to protect shippers from "excessive" prices at substantially lower cost, with less administrative burden, and without significant adverse consequences for the long-term financial viability of the railroads.

Suggested Citation

  • Wesley W. Wilson & Frank A. Wolak, 2018. "Benchmark Regulation of Multiproduct Firms: An Application to the Rail Industry," NBER Working Papers 25268, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25268
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    More about this item

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

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