Railroad Pricing and Revenue-to-Cost Margins in the Post-Staggers Era

The aim of this paper is to look more carefully at the structure of rail rates that has evolved in the 25-year period since the Staggers Rail Act and to assess its impact on the railroad industry. The paper does this by investigating the relationship between car-type-specific marginal costs and car-type-specific rates. These define a set of Lerner indices that are the traditional economic measure of pricing behavior. Taken individually, the Lerner indices are a measure of the market conditions that railroads confront in commodity-specific markets. Taken together in combination with aggregate output measures, the Lerner indices help to determine whether railroad revenues are adequate to cover rail costs. Comparing the ratio of total annual revenues received by each Class I railroad to total (econometrically) estimated costs, we find that this ratio has averaged less than 1.06 in the 23-year period between 1981 and 2004.