Regulatory Reform and Technical Change: New Evidence of Scale Economies in Trucking

Abstract

Economists have long argued against the regulation of motor carriers in the United States because the industry has been considered to be competitive in nature. Federal control of trucking has produced inefficiently high rates as well as costs. Advocates of regulatory reform have foreseen benefits accruing to shippers and consumers in general, as greater rate freedom, the entry of new firms, and the removal of regulatory constraints lead motor carriers to reduce costs [16] and lower prices [17]. Many of these projected benefits were premised on the perceived competitive market structure of the trucking industry. These perceptions have been largely supported by pre-deregulation cost studies of general freight carriers, which have found evidence of either constant returns to scale or diseconomies of scale. Friedlaender and Wang Chiang [8] find that for 20 interregional carriers over 1965-73, the typical firm operating at the sample mean is subject to mild scale diseconomies. In a subsequent study of multiproduct economies of scale using 1976 proprietary data, they [14] obtain the same basic results. The typical firm has constant returns to scale while the representative firm operates under moderate diminishing returns. Daughety, Nelson, and Vigdor [4] also find mild decreasing returns to scale for a panel of firms spanning 1953-58. In another study over 1974-79, Friedlaender and Bruce [6] find slight economies of scale for the typical firm. Based on simulations with the largest and smallest firms in their sample, they suggest that over time large carriers have become more characterized by scale economies and small carriers by scale diseconomies. However, their evidence is far from clear-cut. Given this conventional wisdom that the technology of the less-than-truckload segment of this industry was constant returns to scale before deregulation, few if any economists doubted the desirability of the Motor Carrier Act of 1980. The purpose of this paper is to determine empirically whether the sweeping legislative changes were justified on solely economic grounds. It is possible that previous cost studies are biased as a consequence of the regulatory constraints facing the firms. Has deregulation itself corrected for distortions created by the regulatory environment, and thus produced changes in the production choices of trucking companies? Was Friedlaender and Spady's [7] contention that truckload carriers may have experienced regulatory rather than technology-based increasing returns to scale correct? If so, perhaps past results for general freight carriers are similarly due to regulation. However, in this case, the reason may be regulatory