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I seriously doubt the story that government stepped in to stop railroads from colluding on prices. In Railroads and Regulation: 1877-1916, Gabriel Kolko shows t

by ggreer 6y ago

I seriously doubt the story that government stepped in to stop railroads from colluding on prices. In Railroads and Regulation: 1877-1916, Gabriel Kolko shows that before government regulation, more railroad companies were being founded over time, that freight costs were decreasing, and that government intervention happened because the largest railroads encouraged it. Once the Interstate Commerce Commission was granted authority (through the Elkins Act), one of its first actions was to prohibit railroads from offering rebates and other price discounts. This increased railroad revenue by approximately 10%. It's a similar story for airlines with the Civil Aeronautics Board. The CAB was given the power to regulate airline fares, routes, and to control whether a new airline was allowed to enter the market. From the CAB's founding in 1938 until airline deregulation in 1978, no new trunk airlines were founded. After deregulation, fares plummeted, new airlines flourished, and many incumbent airlines went out of business (either through bankruptcy or acquisition). To quote David Friedman: "If you do not believe that the Interstate Commerce Commission and the Civil Aeronautics Board are on the side of the industries they regulate, figure out why they set minimum as well as maximum fares."

Aloha 6y ago
They did, the rebating prohibition was mostly to stop a carrier from offering favorable shipping rates to one shipper while charging higher rates to another. The ICC methodology was helpful in stopping the roads from abusing shippers, however the ICC regulated the Railroads as if they were the only kind of transportation available, so when the rail industry wanted to lower rates, or reduce service once trucking appeared, they were denied the ability to respond to market conditions. The ICC was also known for its turgid yet protracted decision making process - the Union Pacific, Rock Island Merger case is a great example, the decision making process took so long that the RI basically was bankrupt by the time it was approved, at which point the UP no longer wanted a bankrupt (and 20 years maintenance deferred) road. In addition to that one of the prime forces that led to the NYC/PRR merger, and later bankruptcy, was that because of the ICC price setting mechanism, and other changes to the trackside industries that they served, they were effectively regulated into bankruptcy (there are other contributing factors too, like usurious property tax rates in their operating areas, and inflexible outdated work rules, for example, that required three man crews on diesel locomotives). I don't mean to say that regulation is bad, but one should be careful how that regulation is crafted, and the regulation must be updated from time to time - the underlying methodology must be regularly renewed to ensure they are not girdling the businesses being regulated. That said, the regulatory model used by the ICC and CAB (Trains/Trucks/Busses and Airplanes Respectively) was beneficial early on, but failed to adapt to changing market conditions. Quite Arguably the Staggers Act (Railroad), the Motor Carrier Act of 1980 (Trucks and Busses) Airline Deregulation Act of 1978 (Airlines), left their regulated industries healthier and more competitive than before, and adjusted for inflation, rates for all of these industries are lower now than they ever had been, and all three are (generally) more profitable, while still providing lots of high paying decent jobs for folks.
xg15 6y ago
There are legitimate reasons to set minimum prices: It can prevent price dumping, where a company with deep pockets starves out competition and the hikes the prices once competition is gone (or otherwise abuses its now dominant status). Rebates can also be used to covertly raise prices: Just declare your current price a rebate, then at some point "return" to the regular price which is now higher. Also great for discriminating against certain groups or forcing a certain behavior: Just tailor the rebate to everyone except the group you're targeting.
- ggreer 6y ago
  Sure those are possibilities, but how likely are they in the cases I described? If they were true, we'd expect the opposite trends before regulation: increasing freight prices, fewer railroad companies, less competition on routes. But that wasn't the case. It seems much more likely to me that this was more regulatory capture than benevolent governance. After all, if we assume the railroads wanted to make as much money as possible, why would they welcome a regulatory body? They must have thought that the regulations would help their business.
  - pydry 6y ago
    IIRC the railroads would pretty regularly engage in predatory pricing. It was a primary tactic in killing off or weakening competitors. A bit like Amazon did to diapers.com.
  - mschuster91 6y ago
    > If they were true, we'd expect the opposite trends before regulation: increasing freight prices, fewer railroad companies, less competition on routes. Actually, pre-Coronavirus we regularly saw such effects with Uber and "surge pricing". As soon as an entity has managed dominance in a market and squeezed out competition via VC-subsidized dumping, it will raise prices and the customer service will degrade. For what it's worth this is even valid for entirely "virtual" market spaces. Google, Facebook, Twitter, PayPal and Amazon have no meaningful competition, they've managed to achieve sort-of dominance in their markets, and their customer service is atrocious at best. Amazon is interestingly a bit different because the ones that are getting the crap end of the stick are the third-party vendors who have to fight with co-mingling, AmazonBasics and fraud claims, while the end customers have a pretty decent offering.
LatteLazy 6y ago
Minimum fees are often set because a well funded (large) player can operate a route at a loss, drive less well funded players bankrupt and then put the prices way up after they're the only provider left. It's called predatory pricing. https://en.wikipedia.org/wiki/Predatory_pricing https://en.wikipedia.org/wiki/Predatory_pricing I can't tell you whether the CAB or the ICC actually improved things or not and whether regulatory capture is possible/likely for Big Tech. I'm just saying minimum prices exist for a reason and don't necessarily hurt consumers in the long term.
wombatmobile 6y ago
In nineteenth century USA, railways proliferated early with easy access to capital. In the absence of market regulation and information disclosure standards, the commercial results were often failures and dysfunction, with unbalanced networks, local monopolies, and death spiral competition on oversupplied lines. In his ascent to power, uber banker JP Morgan focused on railroads, America's largest business enterprises. He wrested control of the Albany and Susquehanna Railroad from Jay Gould and Jim Fisk in 1869; led the syndicate that broke the government-financing privileges of Jay Cooke; and developed and financed a railroad empire by reorganization and consolidation in all parts of the United States. https://en.wikipedia.org/wiki/J._P._Morgan#Railroads https://en.wikipedia.org/wiki/J._P._Morgan#Railroads

by ggreer 6y ago

Aloha 6y ago

They did, the rebating prohibition was mostly to stop a carrier from offering favorable shipping rates to one shipper while charging higher rates to another. The ICC methodology was helpful in stopping the roads from abusing shippers, however the ICC regulated the Railroads as if they were the only kind of transportation available, so when the rail industry wanted to lower rates, or reduce service once trucking appeared, they were denied the ability to respond to market conditions. The ICC was also known for its turgid yet protracted decision making process - the Union Pacific, Rock Island Merger case is a great example, the decision making process took so long that the RI basically was bankrupt by the time it was approved, at which point the UP no longer wanted a bankrupt (and 20 years maintenance deferred) road. In addition to that one of the prime forces that led to the NYC/PRR merger, and later bankruptcy, was that because of the ICC price setting mechanism, and other changes to the trackside industries that they served, they were effectively regulated into bankruptcy (there are other contributing factors too, like usurious property tax rates in their operating areas, and inflexible outdated work rules, for example, that required three man crews on diesel locomotives). I don't mean to say that regulation is bad, but one should be careful how that regulation is crafted, and the regulation must be updated from time to time - the underlying methodology must be regularly renewed to ensure they are not girdling the businesses being regulated. That said, the regulatory model used by the ICC and CAB (Trains/Trucks/Busses and Airplanes Respectively) was beneficial early on, but failed to adapt to changing market conditions. Quite Arguably the Staggers Act (Railroad), the Motor Carrier Act of 1980 (Trucks and Busses) Airline Deregulation Act of 1978 (Airlines), left their regulated industries healthier and more competitive than before, and adjusted for inflation, rates for all of these industries are lower now than they ever had been, and all three are (generally) more profitable, while still providing lots of high paying decent jobs for folks.

xg15 6y ago

There are legitimate reasons to set minimum prices: It can prevent price dumping, where a company with deep pockets starves out competition and the hikes the prices once competition is gone (or otherwise abuses its now dominant status). Rebates can also be used to covertly raise prices: Just declare your current price a rebate, then at some point "return" to the regular price which is now higher. Also great for discriminating against certain groups or forcing a certain behavior: Just tailor the rebate to everyone except the group you're targeting.

ggreer 6y ago
Sure those are possibilities, but how likely are they in the cases I described? If they were true, we'd expect the opposite trends before regulation: increasing freight prices, fewer railroad companies, less competition on routes. But that wasn't the case. It seems much more likely to me that this was more regulatory capture than benevolent governance. After all, if we assume the railroads wanted to make as much money as possible, why would they welcome a regulatory body? They must have thought that the regulations would help their business.
- pydry 6y ago
  IIRC the railroads would pretty regularly engage in predatory pricing. It was a primary tactic in killing off or weakening competitors. A bit like Amazon did to diapers.com.
- mschuster91 6y ago
  > If they were true, we'd expect the opposite trends before regulation: increasing freight prices, fewer railroad companies, less competition on routes. Actually, pre-Coronavirus we regularly saw such effects with Uber and "surge pricing". As soon as an entity has managed dominance in a market and squeezed out competition via VC-subsidized dumping, it will raise prices and the customer service will degrade. For what it's worth this is even valid for entirely "virtual" market spaces. Google, Facebook, Twitter, PayPal and Amazon have no meaningful competition, they've managed to achieve sort-of dominance in their markets, and their customer service is atrocious at best. Amazon is interestingly a bit different because the ones that are getting the crap end of the stick are the third-party vendors who have to fight with co-mingling, AmazonBasics and fraud claims, while the end customers have a pretty decent offering.

LatteLazy 6y ago

Minimum fees are often set because a well funded (large) player can operate a route at a loss, drive less well funded players bankrupt and then put the prices way up after they're the only provider left. It's called predatory pricing. https://en.wikipedia.org/wiki/Predatory_pricing https://en.wikipedia.org/wiki/Predatory_pricing I can't tell you whether the CAB or the ICC actually improved things or not and whether regulatory capture is possible/likely for Big Tech. I'm just saying minimum prices exist for a reason and don't necessarily hurt consumers in the long term.

wombatmobile 6y ago

In nineteenth century USA, railways proliferated early with easy access to capital. In the absence of market regulation and information disclosure standards, the commercial results were often failures and dysfunction, with unbalanced networks, local monopolies, and death spiral competition on oversupplied lines. In his ascent to power, uber banker JP Morgan focused on railroads, America's largest business enterprises. He wrested control of the Albany and Susquehanna Railroad from Jay Gould and Jim Fisk in 1869; led the syndicate that broke the government-financing privileges of Jay Cooke; and developed and financed a railroad empire by reorganization and consolidation in all parts of the United States. https://en.wikipedia.org/wiki/J._P._Morgan#Railroads https://en.wikipedia.org/wiki/J._P._Morgan#Railroads