Benchmark Regulation of Multiproduct Firms: An Application to the Rail Industry

Wesley Wilson and Frank A. Wolak

No 25268, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: L5 L9 L92 (search for similar items in EconPapers)
Date: 2018-11
New Economics Papers: this item is included in nep-com, nep-law, nep-reg and nep-ure
Note: EEE IO
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Published as Wesley W. Wilson & Frank A. Wolak, 2022. "Price Benchmark Regulation of Multiproduct Firms: An Application to the Rail Industry," The Journal of Law and Economics, vol 65(S1), pages S155-S190.

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