greyhoundsHey look guys, this whole discriminatory tariff, rebate, monopoly, the railroads couldn't "justify" their rates, etc. thing is a bunch of hooey.
greyhounds has been sounding the same clarion call over and over, but to advance his view of the evils of any regulation across the board, whether in the 19th century or later, he now simply dismisses historical issues as a "bunch of hooey." He makes many good points about how the regulations later in the 20th century became counter-productive. However, dismissing regulation from its beginnings is at varience with the consensus of historical research for many years.
C&NW, CA&E, MILW, CGW and IC fan
This article contains a good balanced summary of differing views on rail regulationin the 19th century: http://www.nber.org/chapters/c6571.pdf
[page 24] "The traditional historical view of regulation, sometimes called the “public interest” or normative theory, held that railroad regulation arose t o protect ship-
pers, especially farmers, from monopolistic abuses. According to this account, regulation sought to force railroads to charge more competitive prices in mo- nopolized, primarily short-haul, markets. In the framework of the economic theory of politics, the winning interest in the battle over railroad regulation was rural industry, primarily agriculture. Farmer activist organizations such as the Grangers were the interest groups that sought regulation and controlled its character. The revisionist view, emphasized by the early research applying the eco- nomic theory of regulation, argued that regulation benefited railroads because it helped them organize more effective regional cartels to prevent competition i n long-haul shipping. To revisionists the long-haul, short-haul rate differential was reduced by setting monopoly prices in structurally competitive long-haul routes. rather than by cutting monopoly prices in short-haul markets. Thus, the winning organized interest was the railroad industry. More recent research has produced a third view. According to this account. the coalition that benefited from railroad regulation included some (but not all) shippers and railroads. Farmers, through activist organizations, received some relief from price discrimination, but the large regional railroads that competed in long-haul markets also received relief from intermittent competitive price wars that more than offset the loss of profits i n monopoly routes. The losers were small railroads with little or no long-haul traffic, and shippers of products in competitive long-haul markets (especially manufacturers). Thus, on each side of the market, the better organized and more powerful interests succeeded at the expense of less powerful, less well organized interests."
schlimm This article contains a good balanced summary of differing views on rail regulationin the 19th century: http://www.nber.org/chapters/c6571.pdf [page 24] "The traditional historical view of regulation, sometimes called the “public interest” or normative theory, held that railroad regulation arose t o protect ship- pers, especially farmers, from monopolistic abuses. According to this account, regulation sought to force railroads to charge more competitive prices in mo- nopolized, primarily short-haul, markets. In the framework of the economic theory of politics, the winning interest in the battle over railroad regulation was rural industry, primarily agriculture. Farmer activist organizations such as the Grangers were the interest groups that sought regulation and controlled its character. The revisionist view, emphasized by the early research applying the eco- nomic theory of regulation, argued that regulation benefited railroads because it helped them organize more effective regional cartels to prevent competition i n long-haul shipping. To revisionists the long-haul, short-haul rate differential was reduced by setting monopoly prices in structurally competitive long-haul routes. rather than by cutting monopoly prices in short-haul markets. Thus, the winning organized interest was the railroad industry. More recent research has produced a third view. According to this account. the coalition that benefited from railroad regulation included some (but not all) shippers and railroads. Farmers, through activist organizations, received some relief from price discrimination, but the large regional railroads that competed in long-haul markets also received relief from intermittent competitive price wars that more than offset the loss of profits i n monopoly routes. The losers were small railroads with little or no long-haul traffic, and shippers of products in competitive long-haul markets (especially manufacturers). Thus, on each side of the market, the better organized and more powerful interests succeeded at the expense of less powerful, less well organized interests."
The material posted above would tend to support that....
"I Often Dream of Trains"-From the Album of the Same Name by Robyn Hitchcock
Greynounds,
I don't have any questions but I do not agree with all of your analysis. First of all, I do not defend Federal regulation of the railroads during most of the 20th century. I believe much or most of it was misguided as the country was a whole was worse off because of it. However, it does lead to the conclusion that individuals who desired consumer goods were necessarily priced out of the market and could not obtain a washing machine or similar thing.
1) I disagree. It is quite possible for a producer of washing machines or anything else to make too many. Also a retailer may buy too many. The producer or retailer must necessarily sell them even if he takes a loss. In that case all costs will not be borne by the end user.
2) If a manufacturer of a given washing machine sells it for $500 and then reduces the price to $300 no doubt he will sell more at the lower price. However a prospective purchaser who sees a $500 machine he cannot afford can shop around for a different model or a less expensive brand that he can afford. Failing to find even that he can shop for a used washing machine. It is not at all clear that he must simply do without one.
3) Everyone seeks to maximize profits, not just washing machine manufacturers.
4) I generally agree. This is why it can make sense to sell some machines at a loss rather than keeping unsold machines.
5) Certainly the costs to produce a washing machine include the costs to transport to the factory where it is assembled and the costs to transport the machine to the consumer. However, the price is determined by the market at any particular moment in time. The market price may not cover all of the costs of production. In that case the machine must be sold at a loss. This is similar to point 1.
6) The more efficiently any part of the manufacturing and distribution process can be accomplished the loser the costs of production. This includes transportation which is part of the costs of production. However, as noted about, the producer sees to maximize profits. He may choose not to reduce prices when his costs are reduced or he may choose to reduce his prices. This is a decision the individual manufacturer makes. Different manufacturers have made different decisions.
7) A lower price for any reason only means more items sold if all other things are held equal. But all other things are never equal. During a depression prices may fall but if incomes fall faster than prices fewer of anything will be sold. If we do hold other things equal and, because of transportation efficiencies, prices of washing machines fall more machines would no doubt be sold. However, it does not follow that fewer people will do without them. What is more likely is that more people will buy a new machine rather than repairing an old one. In a market of first time buyers there is also the option of buying a used and less expensive machine.
8) None of this is to say that lower transportation costs are unimportant or that we should not be concerned with them. Rather, society is not a simple two dimensional thing and there is a variety of ways of dealing with transportation costs that are higher than they really ought to be. The actual number of families who can or cannot afford a washing machine is an empirical rather than a theoretical question.
John
John- Are replying to someone specific?
Thanks to Chris / CopCarSS for my avatar.
Murphy,
Thanks for your question. Yes, I am replying to Greyhounds. I went back and added his name so he and everyone else could know that.
carnej1 I probably should try to find some links to sources but I recall reading that in the early discussions of railroad deregulation that led to the Staggers act there was some concern on the part of several of the most viable Western carriers that deviating from the status quo of regulation might actually hurt their business i.e they were operating very successfully under the existing laws and weren't sure that change wouldn't be for the worse. I suspect it was a case of "the devil you know is better than the devil you don't). The material posted above would tend to support that....
I probably should try to find some links to sources but I recall reading that in the early discussions of railroad deregulation that led to the Staggers act there was some concern on the part of several of the most viable Western carriers that deviating from the status quo of regulation might actually hurt their business i.e they were operating very successfully under the existing laws and weren't sure that change wouldn't be for the worse. I suspect it was a case of "the devil you know is better than the devil you don't).
Concerns in the Staggers era was that no carrier managements or marketing department had EVER conducted business in other than a highly regulated envoirnment, there were many misgivings about mangement's abilities to come to grips with the differences in the ways of doing business between regulated and de-regulated.
From personal observations at the time, it took a number of years for carrier managements to feel out what legitmate business interests for the carriers were and it took a second generation of management to understand that railroads were not a industry on it's death march as so many of Staggers era managers believed. Staggers era managers felt Staggers was only a delaying action to slow the eventual demise of rail transportation, rather the the beginning of the rebirth of rail transportation.
Never too old to have a happy childhood!
John WR Greynounds, I don't have any questions but I do not agree with all of your analysis. First of all, I do not defend Federal regulation of the railroads during most of the 20th century. I believe much or most of it was misguided as the country was a whole was worse off because of it. However, it does lead to the conclusion that individuals who desired consumer goods were necessarily priced out of the market and could not obtain a washing machine or similar thing. 1) I disagree. It is quite possible for a producer of washing machines or anything else to make too many. Also a retailer may buy too many. The producer or retailer must necessarily sell them even if he takes a loss. In that case all costs will not be borne by the end user. 2) If a manufacturer of a given washing machine sells it for $500 and then reduces the price to $300 no doubt he will sell more at the lower price. However a prospective purchaser who sees a $500 machine he cannot afford can shop around for a different model or a less expensive brand that he can afford. Failing to find even that he can shop for a used washing machine. It is not at all clear that he must simply do without one. 3) Everyone seeks to maximize profits, not just washing machine manufacturers. 4) I generally agree. This is why it can make sense to sell some machines at a loss rather than keeping unsold machines. 5) Certainly the costs to produce a washing machine include the costs to transport to the factory where it is assembled and the costs to transport the machine to the consumer. However, the price is determined by the market at any particular moment in time. The market price may not cover all of the costs of production. In that case the machine must be sold at a loss. This is similar to point 1. 6) The more efficiently any part of the manufacturing and distribution process can be accomplished the loser the costs of production. This includes transportation which is part of the costs of production. However, as noted about, the producer sees to maximize profits. He may choose not to reduce prices when his costs are reduced or he may choose to reduce his prices. This is a decision the individual manufacturer makes. Different manufacturers have made different decisions. 7) A lower price for any reason only means more items sold if all other things are held equal. But all other things are never equal. During a depression prices may fall but if incomes fall faster than prices fewer of anything will be sold. If we do hold other things equal and, because of transportation efficiencies, prices of washing machines fall more machines would no doubt be sold. However, it does not follow that fewer people will do without them. What is more likely is that more people will buy a new machine rather than repairing an old one. In a market of first time buyers there is also the option of buying a used and less expensive machine. 8) None of this is to say that lower transportation costs are unimportant or that we should not be concerned with them. Rather, society is not a simple two dimensional thing and there is a variety of ways of dealing with transportation costs that are higher than they really ought to be. The actual number of families who can or cannot afford a washing machine is an empirical rather than a theoretical question. John
Well, there you go. The cost of producing a mass market item, such as a washing machine, has nothing, absolutely nothing, to do with the affordability of the item. It's more "complex" than that. That's why everyone in the world who wants a wasing machine has one. At least a used one.
There's even a washing machine fairy that causes manufacturers to make too many machines, which they then sell at a loss.
If anyone wants to believe the quoted words please be my guest.
greyhoundsThe cost of producing a mass market item, such as a washing machine, has nothing, absolutely nothing, to do with the affordability of the item.
That's not what I said, Greyhounds.
I said: Markets determine prices.
On a dreary Chicago area day, with freezing rain continually forecast but ever later in arrival, I had time to read the cited document. It’s not something to be breezed through quickly. But I wanted to stay close to home. So I had time.
I’m very glad to see the authors acknowledge that railroad regulation introduced inefficiencies in the US economy after the WWI. These inefficiencies had to dampen the economy and reduce the population’s living standards. Inefficiency does create extra costs and these costs have to be borne by the end users of products and services. There’s no one else to bear them.
I disagree with the authors when they say that regulation prior to that time produced beneficial results with little or no adverse effects. They focus on the “Long Haul – Short Haul” controversy in Illinois and make the claim that regulatory action mitigated this “discrimination” by forcing rail charges down to many points while having no adverse effect on railroad development. But, unless I missed it, they present zero evidence that any rates went down because of legislation (Or, in the case of Illinois, the adoption of a new state constitution.) You’d kind of think they’d want to document that before making their claim.
For those who don’t know, the long haul – short haul thing was (and is) about when a railroad would charge more to move a given commodity a shorter distance than it did to move it a longer distance. This is counterintuitive and it will drive people nuts if they don’t understand that there are valid reasons for such rates. It is impossible to base railroad rates solely on mileage
An example cited by William Z. Ripley in his “Railroads: Rates and Regulation” was lemons from California to everywhere else in the US. The rate (before WWI) was $1.00/hundred pounds. To everywhere. The only time anyone complained about this was when the railroads tried to increase the rate to $1.15/cwt. Otherwise, the rail customers were perfectly happy with a rate not having anything to do with mileage.
Why would the railroads price like this? Well, lemons don’t gain value as they are moved further and further away from the lemon tree. A lemon in New York has pretty much the same utility as a lemon in St. Louis. If you keep adding freight charges to the cost of the lemon you’ll move down the demand curve as people decide lemons just aren’t worth their cost. This means the railroads would haul fewer and fewer lemons as the distance from California increased.
Now understand this in terms of a railroad’s cost structure. Until a rail line approaches its effective capacity it has average costs that decline as volume is added to the line. And, the marginal cost will be below the average cost. The railroad obviously has to cover its average cost in aggregate but it can go below average cost down to the marginal cost and still come out ahead. (No customer has to “Make Up” for the pricing below average cost. No one is harmed. The railroad is better off taking the freight or it wouldn’t seek the freight.)
Lemons from California could go from a real railroad money maker at St. Louis to marginally profitable in New York, but the eastern carrier would still want to haul as many carloads of lemons as it could. Unless it was having capacity issues. Marginally profitable beats nothing.
How does this relate to the cited article? The same principals apply. The first case to hit the courts involved the movement of lumber on the Chicago and Alton from Chicago to Lexington, IL and Bloomington, IL. Lexington is 16 miles closer to Chicago than Bloomington. The C&A charges are given at $5.65/thousand to Lexington and $5.00/thousand to Bloomington. (They don’t say 1,000 of what, but I guess it to be board feet.) The C&A was charging more for a shorter haul. Was that “unjust” discrimination against Lexington? (The adjective is important. There’s nothing wrong with discrimination unless it’s done for an “unjust” reason. Racial and gender discrimination are unjust, discriminating against slow runners in selecting a track team is good practice.)
The C&A claimed it wasn’t. It wasn’t happy with the rate to Bloomington. They felt it was too low. But, the Illinois Central rate from Chicago to Bloomington was $5.00/thousand. The C&A couldn’t charge any more than that and participate in the business. They had to cover their average costs (Lexington rate) but when market conditions and competition dictated they could go lower (Bloomington rate). In any event, the only injured party was the C&A – they were the one foregoing revenue on the Bloomington shipments.
So what happened? Well, the C&A won the 1st round. But the legislature rewrote the law. Back to court where the C&A was ordered to “Stop That.” The Illinois Central, along with other railroads, found themselves facing similar situations. So they all got together and raised their rates to places like Bloomington. (This was not illegal.) The railroads, which had been competing, were encouraged to collude by the regulation.
I don’t see situations such as the Lexington/Bloomington dispute as discrimination at all. I see them as reality based competitive pricing decisions made in accordance with the railroads’ cost structure. The people who get upset with this, in the words of Ripley's cited book, “Substitute mileposts for brains.” It’s not the last time the government has tried to alter economic reality by statute or, in this case, a state constitution adopted by popular vote. It rarely works well.
Yes, greyhounds, that would be board feet, which is the standard measure for lumber. For the benefit of any of you who may not know of the measure, one board foot is 1" x 1" x 12"--or any dimensions which would give 12 cubic inches of undressed (roughcut) lumber. Of course, when you dress the lumber so that its sides are smooth, you remove wood--a roughcut 2x4 is 2" x 4", but a dressed 2x4 is 1 1/2" x 3 1/2"--and a 1 foot dressed 2x4 still is considered to contain 8 board feet.
In the cited case, the actual dimensions--length, width, thickness--did not matter; what mattered was the volume of wood that was shipped.
At times, the price for lumber may be expressed simply in dollars, with the "per thousand board feet" understood.
Johnny
greyhoundsThere’s nothing wrong with discrimination unless it’s done for an “unjust” reason. Racial and gender discrimination are unjust, discriminating against slow runners in selecting a track team is good practice.
One think I have never understood, Greyhounds, is the railroad's practice of price discrimination. If I mail a package all the Post Office cares about is where it is going and how much it weighs. Can you explain why railroads charge different prices to move different things?
7 or 8 between NYC & Buffalo? NYC, Erie, Lackawanna, LV, & if you really stretch it, PRR (who wants to go by way of Philly & Harrisburg?), & B&O would be a SUPER-STRETCH (by way of Baltimore & Cumberland, Md, come on!!), so that's FOUR!! MAYBE 5. not 7 or 8.
John WR greyhoundsThere’s nothing wrong with discrimination unless it’s done for an “unjust” reason. Racial and gender discrimination are unjust, discriminating against slow runners in selecting a track team is good practice. One think I have never understood, Greyhounds, is the railroad's practice of price discrimination. If I mail a package all the Post Office cares about is where it is going and how much it weighs. Can you explain why railroads charge different prices to move different things? John
Let's say you are hauling gold and coal - you wreck the shipments. Are you going to pay the beneficial owner of the shipment the same value per ton as a settlement? Would the beneficial owners accept the same value per weight?
BaltACDLet's say you are hauling gold and coal - you wreck the shipments. Are you going to pay the beneficial owner of the shipment the same value per ton as a settlement? Would the beneficial owners accept the same value per weight?
When you ship something, you pay for weight and distance. That is how every other transportation system works, except US freight railroads. If there is insurance, say by ICC when using a moving company, it is by weight, unless the shipper purchases for replacement value.
I'm afraid I don't see your point, Balt. It seems to me that it would cost the same amount of money for a railroad to transport a ton mile of coal as it would cost to transport a ton mile of gold.
In the event of an accident I suspect railroads specific agreements and policies about loss and damage. Insurance to cover accidental loss is not really a transportation cost and appropriate insurance can be broken out and charged separately. I don't know how railroads actually provide for insurance. I would also suspect transporting a ton of gold would call for special insurance.
To get back to my Post Office example, when I mail a package parcel post insurance coverage is included in the postage. However, if I am mailing something especially valuable I can purchase additional insurance. I might also want to purchase a special service like sending it registered mail and declaring what is in the package to be sure I am covered in case of loss.
But I'm really talking about the cost of transportation, of actually moving freight from point A to point B.
As a matter of law railroads are liable for loss and damage to goods they transport. The measure of value in FOB origin. There is no insurance on either side of the transaction. There are some, not many, released value rates by which the shipper agrees to value his product at a stated value less than actual value in return for a lower freight rate. This is a special case, the norm is carrier is liable for the full value of the cargo.
Mac
It has been a couple of decades, but I was involved in transportation (LTL trucking) and my responsibilities involved pricing and claims (loss or damage).
At that time there was a document called the NTFC which stood for "National Transportation Freight Classification". In that document, which was a 1000 page + tariff, commodities were assigned a "freight class". These classes ranged from class 50 thru class 500. Class 50 were items such as steel. Class 500 were very light weigh density products (think something like feathers). In 10 years of managing freight shipments, I never encountered a class 500 (Class 300 was about the highest).
There were 15 factors which were applied to determine the freight classification. Value of the product was one of the factors. The value of the lading was VERY MUCH a cost of transportation due to potential loss or damage. On certain high value products, shippers could declare a low value and have a lower freight charge. The exchange was limited liabilty in return for lower freight charges.
The rates were applied based on the class of the freight and essentially the distance. As deregulation swept thru the industry, the classification system and mileage rates remained, but trucking companies began customizing pricing to fit the shipper's needs, with rates typically falling.
Granted LTL trucking and railroading are different, but have similarities. LTL trucking involves multiple shipments in a single trailer moving from terminal thru break bulk terminals and finally delivered by a destination terminal. Often 3 or more terminals were involved. Think of how many terminals or yards are involved with a carload shipment.
While an LTL truck might have 20 to 30 different shipments with varying origins/destinations, a manifest freight train might have nearly 100 different shipper/consignees.
Take a look at any railroad tariff today. The documents are on line at the websites. Note the differences in rates for commodities. There are a number of factors which go into the final rates. So, while weight and distance are key factors in pricing (note I said pricing, not cost), there are many many more.
Ed
It's based primarily on the differential of the value of the stuff from where it is to where it's being moved to. If a refrigerator costs $500 to make in China and I'm willing to pay $1000 in my local Lowes, then the transport is worth some portion of the $500 difference.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
Thanks, Don, Balt, and Mac for your explications of different rates for different commodities. When you have worked with shipping for a few years, you know there are these differences, and you have some understanding of them.
When I was returning (almost) empty drums and "empty" gas cylinders, I did not have to worry about writing the class on the bill of lading; I would say that the trucking company knew what the classes were. But, when I was shipping vacuum pumps to be repaired, I did put the class on the bill if I had to write it (our shipping department usually took care of this, but there were times when I had to do all the work).
As to reduced rates for a particular company, the trucking company and the shipping, or receiving company, in the case of collect shipments, company better have a written contract, or horrible results could occur (a future bill for the difference between what was paid and the standard tariff, perhaps). I had a close working relationship with the traffic department in my plant, and I made sure that all was done properly.
As to shipping something via the Postal Service, there are different rates, depending upon what is being shipped and how fast you want it to reach its destination. There is still a book rate, which is lower than the parcel post rate, and there used to be a library rate (it may still exist; I have not shipped any books to a library in more than 54 years) which held when a library sent books and when the books were returned.
Incidentally, the FOB point is the point at which ownership changes. Why it is called Freight on Board, I do not know.
MP173There were 15 factors which were applied to determine the freight classification.
Thanks for the explanation, Ed.
PNWRMNMAs a matter of law railroads are liable for loss and damage to goods
Mac,
Thanks for explaining the liability issue. It just seemed to me that if gold were shipped that is a very special kind of freight and I would expect it to be done in a special way.
oltmannd If a refrigerator costs $500 to make in China and I'm willing to pay $1000 in my local Lowes, then the transport is worth some portion of the $500 difference.
Don,
Certainly when goods are priced in a retail store all costs of production including transportation have to be included in that price. I do accept that part of Greyhounds argument.
DeggestyThere is still a book rate, which is lower than the parcel post rate, and there used to be a library rate (it may still exist;
Johnny,
I overlooked the Post Office's book rate simply because I don't use it but ship many other things by parcel post frequently. I don't know about the library rate.
rdg2124 7 or 8 between NYC & Buffalo? NYC, Erie, Lackawanna, LV, & if you really stretch it, PRR (who wants to go by way of Philly & Harrisburg?), & B&O would be a SUPER-STRETCH (by way of Baltimore & Cumberland, Md, come on!!), so that's FOUR!! MAYBE 5. not 7 or 8.
I'm no expert on the geopgraphy of that part of the world, so corrections are welcomed. True, the ones you mention are the only ones going all the way from NYC to Buffalo, but there are others which serve at least a portion of that territory. Lehigh & New England, NYO&W, Lehigh and Hudson River, and CNJ all serve at least part of the territory, unless my memory is playing tricks, and possibly Reading. This many RR's serving even a part of an area have to siphon off a significant amount of potential revenue.
Correct me if I'm wrong, won't be the first or the last time.
John WR One think I have never understood, Greyhounds, is the railroad's practice of price discrimination. If I mail a package all the Post Office cares about is where it is going and how much it weighs. Can you explain why railroads charge different prices to move different things? John
The short answer is that the railroads charge different amounts for different commodities for the same reason that an airline will charge different amounts for similar seats on the same flight. You can’t price above the value of the service to the customer. Before the airlines were deregulated they pretty much used a “One Fare Fits All’ pricing system by government fiat. This resulted in tremendous inefficiency with 45% of the seats unsold. The same inefficiency would come to railroading with a one price for everything system.
It is important to realize that there is no such thing as “The Cost.” There are average costs, marginal costs, variable costs, fixed costs, etc. Understanding the components of each of these and how each cost changes with volume changes on a rail line is necessary. Throw in the fact that a carload shipment can move over multiple lines en route with each line having different cost characteristics and you may get some concept of just how difficult (impossible?) it is to accurately “Cost Out” a carload movement in a multiple product business such as railroading. My experience was that rail carload costing was largely just an aggregation of allocated averages. It was of very limited use in pricing and often did more harm than good.
Early on railroaders learned that they could not use a simple mileage based rate system with all commodities moving at the same rate per mile. The freight charges affect different commodities differently and this has to be taken in to account. The classic example is men’s suits. These suits are relatively high value, low weight, and each requires very little space in a railcar. Conversely, wheat is very low in value for the weight and space it requires. The same freight charge that will have negligible effect on the final sale price of a suit would easily more than double the price of wheat between the farm and destination. Men’s suits and wheat are different market segments with different demand curves and the railroads had to, and have to, often deal with these differences in their pricing.
The example that I’ve used before is a hypothetical railroad that runs from point A, where there is a coal mine, to point B, where there is a power plant. The railroad’s sole traffic is moving the coal from the mine to the power plant. Its costs for moving the coal are $1,000/car variable and $500/car fixed. This equals an average cost of $1, 500/car. (This railroad is obviously not multi-product. This makes cost determination simpler.)
Now let’s say that the railroad in question has a chance to add a commodity. Let’s say ethanol. An ethanol producer at point A wants to ship their product to point B. The railroad figurers, as best they can, that the variable cost of moving a carload of ethanol will be the same as moving a carload of coal, $1,000. But, the ethanol producer won’t ship at a rate of more than $1,200/car. That’s the value of the service to the ethanol producer and they will not pay more than that. This is below the current average cost of $1,500 and below the rate the coal shipper is paying.
What should the railroad do? Please remember that the fixed costs will not change with the ethanol movement. The railroad will be $200 ahead for each ethanol load shipped.
It’s obvious. The railroad should establish a commodity specific rate on ethanol of $1,200 while holding the rate on coal at or above $1,500. It cannot bring the coal rate down to $1,200 without going broke. If it insists on getting $1,500/car for the ethanol it won’t be shipped. The best solution for all concerned is the establishment of different rates on the different commodities. The railroad and the ethanol producer come out ahead while the coal shipper is not harmed in any way.
And that’s one of the reasons why there are commodity specific rates.
Regarding the routing of shipments, a general rule is that, all things being equal, shippers prefer dealing with one carrier versus two, with two versus three, and so on. Simplicity and ease mean lower administrative expense and hassle. It's easier administratively not having to figure out whom to call to find the location of your incoming shipment if just one carrier is named in the route. It follows that traffic between, say, North Jersey and Chicago went mostly via the roads that offered single-line service -- Erie (later EL), NYC, PRR. the rest fought for the scraps like beta members of a wolf pack. Little guys like L&NH had more leverage if the consignee/shipper was located solely on their line, and so got some business that way, but beyond that, had to claw and scratch and beg and plead for every joint line carload they bridged. So, potentially, they could "siphon off a significant amount of potential revenue," but practically speaking, that revenue remained just that -- potential, and not revenues actually collected. In this sense they lived, truly, at the mercy -- or whim -- of shippers.
greyhoundsIt’s obvious. The railroad should establish a commodity specific rate on ethanol of $1,200 while holding the rate on coal at or above $1,500.
Greyhounds,
Let me start off by thanking you for the explanation I asked for. I appreciate it.
And you are right. It is obvious the railroad should accept the ethanol shipments for $1200 a carload while shipping coal for $1500.
But the suit makers and the wheat farmers is not so obvious. Suit makers did not become dissatisfied with the way railroads treated them and start political agitation. However, wheat farmers did just that. And, over a period of years, that agitation resulted in Federal regulation of railroad rates. Might railroads have dealt with wheat farmers and with the government in a different way that would have resulted in less onerous regulation if not no government regulation at all? I think they could have. Of course that was then and this is now. I hope and I suspect freight railroads have learned from their history and will do better at dealing with government and shippers of wheat and similar commodities.
Sure the railroad can charge what it can, but stiffing one or two shippers with all the fixed costs may cause them to use a competitor if they find out. The trouble was, for many of the farmers in the 19th century, there was no competitor or competing lines didn't compete on price (collusion).
Schlimm,
The example was a hypothetical railroad shipping only 2 commodities both of which used its terminal points. It is common to use hypothetical examples that over simplify an issue in order to illustrate certain aspects of it. I thing the example was reasonable.
The issue of wheat farmers shipping their wheat was not part of the example. However, it was very real in the 19th and 20th century and a lot of wheat is still shipped by rail. There is more than one way to resolve issues in the US. When wheat farmers were unable to get railroads to take them seriously they turned to the government and they were a lot more successful there as you point out. Much of the objection to government intervention is simply saying "Ain't it awful what the government did." Well, it was awful for the railroads but better for the wheat farmers. And if railroads should be free to pursue their self interest in any way they can why shouldn't wheat farmers have that same freedom? That is all that happened.
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