An Analysis of Regulatory Change in the Transportation Industry

Abstract

HIS paper develops and applies a model for analyzing regulatory change in the freight transportation industry. The model incorporates multiple product markets, multiple transport modes and imperfect competition between the modes. An application of the model to consider some of the consequences of extending the Interstate Commerce Commission's agricultural exemption to the railroads, for the movement of corn in the Midwest, is provided. The analysis has three significant elements. First, we extend the work in Daughety and Inaba (1978a,b) to obtain transport demands that are based on the theory of the firm. The shipper chooses markets to ship to, mode to ship by, as well as output level and amounts to ship. He faces transport modes that are differentiated by service characteristics which are generally stochastic in nature. Analyses of demand for freight transport that have been especially attentive to transport service characteristics and other micro-parameters include Allen (1970), Boyer (1977), Daughety and Inaba (1978a,b) and Levin (1978). While varying in some degree as to form and technique, these studies have all attempted to estimate disaggregate models of shipper behavior. In some cases this behavior was eventually aggregated to some form of market (or industry) demand functions. While such analyses are generally time-consuming and expensive the results have (at least sometimes) been worth the effort, paying off in models of demand that are responsive to important market parameters. Second, we propose a mechanism for constructing equilibria in imperfectly competitive transport markets. The underlying approach is to introduce a coniectural variations narameter that reflects different assumptions about how carriers will react to the actions of competitors. Third, we apply our methods to examine some of the consequences of extending the agricultural exemption (see, e.g., Locklin (1972)) to the railroads. Three market equilibria are computed: A base case wherein rail is regulated and trucks are unregulated and two polar deregulation cases wherein railroads act either competitively or in a coordinated fashion. Data to estimate transport demands were obtained from a survey of country grain elevator operators on shipments of corn originating in the Midwest (Iowa, Illinois and Indiana) and destined for interior, East Coast and Gulf Coast markets. ICC data were used to estimate rail cost functions, while survey data were used to provide truck rate functions, surrogates for truck supply functions. Our computations indicate that while transport rates will generally nrse after deregulation, rail rates will increase relatively more in markets characterized by low-volume or, short-haul activity. This will encourage a redistribution of freight patterns between rail and truck. Essentially, we argue that trucks will dominate in low-volume or short-haul markets so that just about all shipments made by country grain elevators will be by truck. On the other hand, rail will predominate over shipments made from inland terminal elevators to coast export markets, even in the face of barge competition. It is particularly interesting that these conclusions are implied by either of the two polar deregulation cases. That is, our conclusions are the same whether railroads price competitively or coordinate their actions. Of course, there is one difference: rates will tend to be slightly higher under coordination.