An economic investigation into railroad pricing and car allocation programs

Gregory Roy Pautsch

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The movement of grain by the railroad industry is plagued by the consistent presence of car shortages and surpluses. Due to these difficulties and others the Staggers Rail Act of 1980 was passed;In the pre-Staggers system, the railroad chooses its tariff and capacity before knowing demand which creates the persistent cycle of car shortages and car surpluses. Shippers order conventional rail service, with full information, on a spot basis;Recently, railroads have instituted car ordering systems offering guaranteed service as well as conventional tariff service. Guaranteed service is ordered by shippers in advance and before possessing full grain market information. Guaranteed service orders cannot be rationed by the railroad. The effect of guaranteeing service is divided into the shipper externality, informational effect, and the rail car productivity effect;The shipper externality is identified as the shippers failing to take into account the effect of their guaranteed car order on the conventional service ration quantity available to all shippers. The externality serves to reduce shipper expected profit;The railroad is able to extract the grain market information possessed by shippers by offering guaranteed service. The additional grain market information allows the railroad to make a more informed capacity decision. The informational effect increases total welfare and expected railroad profits. Expected shipper profit may increase or decrease;Guaranteed service is purchased in advance giving the railroad advance notice of the specific origin and destination of future movements. With this advanced information, the railroad is able to reduce its car cycle time and increase the productivity of its cars in guaranteed service. The rail car productivity effect always increases total welfare and expected railroad profit. Expected shipper profit either increases or remains unchanged;Currently, railroads limit the amount of guaranteed service shippers may acquire. The reasons for this limit appear to be more political than economic. The limit appears to serve as a public relations device to ensure shippers there is enough rail capacity for it to satisfy its common carrier obligation. The effect of the guaranteed service limit is to decrease expected railroad profits, expected shipper profits, and thus total welfare.

Date: 1995-01-01
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