Working Paper: NBER ID: w25268
Authors: Wesley W. Wilson; Frank A. Wolak
Abstract: A number of formerly regulated multiproduct industries have a transitional or permanent residual regulatory mandate to protect consumers from "excessive" prices. The legislation that deregulated most rail rates contains a statutory mandate for the regulator to protect shippers from "excessive" prices. Fulfilling this mandate has been challenging because of the cost and administrative burden to shippers in obtaining regulatory relief. Moreover, as argued by Wilson and Wolak (2016), the existing rate relief mechanism is based on a cost concept that does not reflect the actual incremental cost of a shipment and it does not adequately address the question of what constitutes an "excessive" rate for a multiproduct firm with significant common costs. This paper analyzes a benchmark price approach to identifying "excessive" prices in multiproduct industries subject to residual price regulation. Our empirical analyses demonstrate how the mechanism can be used to fulfill the statutory mandate to protect shippers from "excessive" prices at substantially lower cost, with less administrative burden, and without significant adverse consequences for the long-term financial viability of the railroads.
Keywords: rail industry; benchmark pricing; excessive prices; regulation
JEL Codes: L51; L92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| benchmark pricing mechanism (L11) | identification of excessive prices (D42) |
| actual price exceeds benchmark price (D41) | deemed excessive (H72) |
| benchmark pricing implementation (G13) | protection of shippers from excessive pricing (L11) |
| benchmark pricing mechanism (L11) | lower costs and reduced administrative burdens (K23) |
| benchmark pricing mechanism (L11) | minimizes misclassification errors in identifying excessive prices (D40) |