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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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    References listed on IDEAS

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    1. Ernst Berndt & Ann Friedlaender & Judy Chiang & Christopher Vellturo, 1993. "Cost effects of mergers and deregulation in the U.S. Rail industry," Journal of Productivity Analysis, Springer, vol. 4(1), pages 127-144, June.
    2. Wesley W. Wilson & Frank A. Wolak, 2016. "Freight Rail Costing and Regulation: The Uniform Rail Costing System," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(2), pages 229-261, September.
    3. Russell Pittman, 2010. "Against the stand-alone-cost test in U.S. freight rail regulation," Journal of Regulatory Economics, Springer, vol. 38(3), pages 313-326, December.
    4. Mark Burton & Wesley W. Wilson, 2006. "Network Pricing: Service Differentials, Scale Economies, and Vertical Exclusion in Railroad Markets," Journal of Transport Economics and Policy, University of Bath, vol. 40(2), pages 255-277, May.
    5. Burton, Mark L, 1993. "Railroad Deregulation, Carrier Behavior, and Shipper Response: A Disaggregated Analysis," Journal of Regulatory Economics, Springer, vol. 5(4), pages 417-434, December.
    6. McFarland, Henry, 1989. "The Effects of United States Railroad Deregulation on Shippers, Labor, and Capital," Journal of Regulatory Economics, Springer, vol. 1(3), pages 259-270, September.
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    9. MacDonald, James M, 1989. "Railroad Deregulation, Innovation, and Competition: Effects of the Staggers Act on Grain Transportation," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 63-95, April.
    10. James M. MacDonald & Linda C. Cavalluzzo, 1996. "Railroad Deregulation: Pricing Reforms, Shipper Responses, and the Effects on Labor," ILR Review, Cornell University, ILR School, vol. 50(1), pages 80-91, October.
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    12. John Bitzan & Wesley Wilson, 2007. "Industry costs and consolidation: efficiency gains and mergers in the U.S. railroad industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 30(2), pages 81-105, March.
    13. Wilson, Wesley W, 1997. "Cost Savings and Productivity in the Railroad Industry," Journal of Regulatory Economics, Springer, vol. 11(1), pages 21-40, January.
    14. Wilson, Wesley W, 1994. "Market-Specific Effects of Rail Deregulation," Journal of Industrial Economics, Wiley Blackwell, vol. 42(1), pages 1-22, March.
    15. Kenneth D. Boyer, 1987. "The Costs of Price Regulation: Lessons from Railroad Deregulation," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 408-416, Autumn.
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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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