The Economics of Railroad “Captive Shipper” Legislation
Recent rate increases by freight railroads have refocused attention on regulation, deregulation, and regulatory reforms in the railroad industry. Some shippers have complained that a lack of competition among railroads adversely affects their shipping options and makes them “captive” to the high rates charged by the railroad companies serving them. While such complaints have a long history in the railroad industry, significant rate increases since the early 2000s, coupled with increased profits by the large railroads, have given them greater weight.
Legislation introduced in the U.S. Congress would amend existing federal statutes so as to render railroad mergers, acquisitions, collective ratemaking, and other “anticompetitive conduct” subject to the jurisdiction of the antitrust statutes, with potential enforcement both by the Antitrust Division of the Justice Department and the Federal Trade Commission, and through lawsuits brought by state attorneys general or private parties. This paper examines the economic issues raised by such legislation and seeks to evaluate its likely effects on competition and welfare.
Two classes of railroad behavior that seem likely to come under increased scrutiny and attack if jurisdiction is granted to the antitrust enforcement agencies are, first, the creation by the railroads of “paper barriers” to future interconnection with competing railroads in conjunction with the spin-off of local and regional rail lines, and, second, the ability of railroads to “refuse to deal” with competing railroads regarding the traffic of captive shippers. The analysis suggests that the proposed statutory reforms in these two areas may indeed act to limit the ability of railroads with market power to exploit that power at the expense of captive shippers.
In particular, it seems likely that antitrust jurisdiction would impose time limits on the “exclusive dealing” requirements or incentives that often accompany the spin-off of a line from a class I railroad to a class II or III, and this would increase the level of competition enjoyed by shippers in the longer term. Other types of policies, such as mandatory switching – whether achieved through regulation or through antitrust challenge – face greater hurdles owing to the already highly concentrated structure of the U.S. railroad industry, but may nevertheless have some effectiveness in protecting captive shippers as well.
Overall, however, the restoration of antitrust liability to an industry already highly concentrated through merger may be no more effective at protecting captive shippers than strengthening of the regulatory protections offered by the Surface Transportation Board, in particular the replacement of the stand-alone-cost test with a ceiling on the price/variable cost ratio imposed under certain conditions.