30.4.07

ANTICIPATING DEREGULATION. Just before the Staggers Act took effect, Ann Friedlaender and Richard Spady published Freight Transport Regulation: Equity, Efficiency, and Competition in the Rail and Trucking Industries. I recently read through it for insights into modeling competition between two modes, one subsidized, one for profit, offering multiple products. There are a few ideas to develop further. As the 50 Book Challenge rules do not confine readers to reviewing new books (there's always somebody going to claim Ulysses or War and Peace after all) this Book Review No. 9 will focus on a few of the book's findings retrospectively. The research suggested that even under regulation, the bulk commodities were bearing a disproportionate share of the railroads' common and joint costs, despite the Interstate Commerce Commission's use of value of service pricing under which high valued finished goods were supposed to pay a higher markup over marginal cost. It's no surprise given those findings that the remaining major railroads all have substantial business in the coal fields. The rate structure in the final years of regulation was also one in which rates were below marginal costs in what railroaders call the Official Territory and what journalists call the Rust Belt. The authors conclude with a welfare-economics appeal to introduce deregulation in such a way as to cushion its adverse effects: perhaps that would have entailed a slower decline of the heavy industry of the Official Territory and a slower deregulation of trucking. (In that alternative history, would Wal-Mart have become the retail power we now know even more rapidly by integrating backward into trucking and manufacturing to take advantage of the private-carrier exemptions.)

The book completely missed -- as did all the Great Experts of the day -- the combination of intermodal cooperation and international trade under which the railroads reclaimed much of the time-sensitive high-value traffic by running van trains under contract to specific shippers. That's a cautionary tale that adaptations to rule changes cannot always be anticipated.

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