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Economies of Density and Regulatory Change in the U.S. Railroad Freight Industry

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  • Bitzan, John D
  • Keeler, Theodore E

Abstract

Two reform acts, the Staggers Railroad Act of 1980 and the Railroad Revitalization and Regulatory Reform Act of 1976, represented big changes in U.S. policy toward railroads. An important welfare gain from these changes predicted by researchers was the efficiency gain from increased densities in rail freight traffic. However, few retrospective studies have analyzed the accuracy of these predictions. The present paper fills this gap by analyzing the effects of regulatory changes on freight traffic density, through simulation of the cost savings from gains in density, using a newly estimated rail cost function, and by comparison of these results with earlier predictions. Our results indicate net benefits of $7-$10 billion per year (as of 2001), stemming from cost savings from increased traffic densities relative to what would have occurred under regulation. These benefits are substantially higher than those predicted by researchers in the 1970s and early 1980s, for reasons explained in the paper.

Suggested Citation

  • Bitzan, John D & Keeler, Theodore E, 2007. "Economies of Density and Regulatory Change in the U.S. Railroad Freight Industry," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 157-179, February.
  • Handle: RePEc:ucp:jlawec:y:2007:v:50:i:1:p:157-79
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    File URL: http://dx.doi.org/10.1086/508308
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    References listed on IDEAS

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    1. Robert G. Harris, 1977. "Economies of Traffic Density in the Rail Freight Industry," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 556-564, Autumn.
    2. Braeutigam, Ronald R & Daughety, Andrew F & Turnquist, Mark A, 1984. "A Firm Specific Analysis of Economies of Density in the U.S. Railroad Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 33(1), pages 3-20, September.
    3. Keeler, Theodore E, 1974. "Railroad Costs, Returns to Scale, and Excess Capacity," The Review of Economics and Statistics, MIT Press, vol. 56(2), pages 201-208, May.
    4. Harbeson, Robert W, 1969. "Toward Better Resource Allocation in Transport," Journal of Law and Economics, University of Chicago Press, vol. 12(2), pages 321-338, October.
    5. Richard C. Levin, 1981. "Regulation, Barriers to Exit, and the Investment Behavior of Railroads," NBER Chapters,in: Studies in Public Regulation, pages 181-230 National Bureau of Economic Research, Inc.
    6. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-676, August.
    7. John D. Bitzan & Theodore E. Keeler, 2003. "Productivity Growth and Some of Its Determinants in the Deregulated U.S. Railroad Industry," Southern Economic Journal, Southern Economic Association, vol. 70(2), pages 232-253, October.
    8. Grimm, Curtis M & Winston, Clifford & Evans, Carol A, 1992. "Foreclosure of Railroad Markets: A Test of Chicago Leverage Theory," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 295-310, October.
    9. Zvi Griliches, 1972. "Cost Allocation in Railroad Regulation," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 26-41, Spring.
    10. Harris, Robert G & Winston, Clifford M, 1983. "Potential Benefits of Rail Mergers: An Econometric Analysis of Network Effects on Service Quality," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 32-40, February.
    11. Ellig, Jerry, 2002. "Railroad Deregulation and Consumer Welfare," Journal of Regulatory Economics, Springer, vol. 21(2), pages 143-167, March.
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    Citations

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    Cited by:

    1. John Bitzan & Theodore Keeler, 2014. "The evolution of U.S. rail freight pricing in the post-deregulation era: revenues versus marginal costs for five commodity types," Transportation, Springer, vol. 41(2), pages 305-324, March.
    2. R. Pittman, 2009. "Railway Mergers and Railway Alliances: Competition Issues and Lessons for Other Network Industries," Competition and Regulation in Network Industries, Intersentia, vol. 10(3), pages 259-279, September.
    3. Bitzan, John D. & Wilson, Wesley W., 2007. "A Hedonic Cost Function Approach to Estimating Railroad Costs," Research in Transportation Economics, Elsevier, vol. 20(1), pages 69-95, January.
    4. Fumitoshi Mizutani & Shuji Uranishi, 2013. "Does vertical separation reduce cost? An empirical analysis of the rail industry in European and East Asian OECD Countries," Journal of Regulatory Economics, Springer, vol. 43(1), pages 31-59, January.
    5. James MacDonald, 2013. "Railroads and Price Discrimination: The Roles of Competition, Information, and Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 43(1), pages 85-101, August.
    6. Train, Kenneth & Wilson, Wesley W., 2007. "Spatially Generated Transportation Demands," Research in Transportation Economics, Elsevier, vol. 20(1), pages 97-118, January.

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