Abstracts Category : Other

Railroads, Their Regulation, and Its Effect on Efficiency and Competition

by Taylor McKenzie

Railroads have been subject to federal regulation since 1887. Due to the development of competing modes of transportation and changes in types of products being shipped, regulation began to impede efficiency and viability of firms, leading to partial deregulation of the industry in 1980. Partial deregulation allowed railroads to reduce costs, notably through mergers and line abandonment, which were aggressively pursued following deregulation and led to dramatic efficiency gains. However, concerns remain over increased consolidation, lack of competition in the industry, and the ability of firms to continue to realize efficiency gains. This dissertation investigates more recent developments in the rail industry with an eye towards regulation's effect and role.I begin with a study into the markups of price over marginal cost and elasticities of scale in the rail industry. Scale elasticities provide information on where firms are operating on their average cost curves, and markups provide a more theoretically appealing method of examining pricing behavior than the revenue-to-variable-cost measure currently used by regulators. I extend previously developed methods to identify markups and scales for each firm and in each year. I find prices well in excess of marginal cost, and evidence firms are operating near minimum efficient scale, indicating efficiency gains from deregulation may be fully realized.I then present a study that examines productivity changes in the rail industry and the role of technological change. I extend stochastic frontier frameworks to allow productivity and the state of technology to evolve flexibly through time and vary across firms. I find firms turn towards technological innovation to realize productivity gains when other channels previously offered by deregulation are not available.I finish with a study of allocative errors in the rail industry. I again extend a stochastic frontier model to include differences in production across firms and allow allocative errors to be correlated with competitive pressures. I find that incorporating flexibility into the description of firm production is crucial for obtaining unbiased estimates of allocative errors, overcapitalization is prevalent in the rate-regulated rail industry, and additional competition does not appear to reduce inefficiency.This dissertation includes unpublished co-authored material.Advisors/Committee Members: Wilson, Wesley (advisor).