Simple Protections from the Abuse of Market Power: The Complicated Reality

Michael Smith

Advisor: Daniel B Klein, PhD, Department of Economics

Committee Members: Tyler Cowen, Donald J. Boudreaux

Buchanan Hall, #D180
April 25, 2017, 02:00 PM to 10:30 AM


The concept seems straightforward enough, if customers of a business that has market power (usually because the business has a monopoly or oligopoly situation) then those customers ought to be protected from the business’s charging too much of a premium. The layman’s view is that such abuses should be easy to detect and simple to remedy. But such tasks are far from simple.

The dissertation provides a detailed examination of those simple protections as they are created and enforced by a little-known federal adjudicatory agency known as the Surface Transportation Board (STB). The STB inherited its regulatory functions from the Interstate Commerce Commission (ICC). And while the ICC is well known, it has not existed since 1996, when it was terminated and the STB created to fill the void.

And while the STB oversees regulating all surface transportation modes, its primary function rests with regulating railroads, ensuring that the prices they charge do not result in the abuse of their customers. The STB’s mission is laid out in the Staggers Act of 1980. That Act required the removal of the heavy hand of regulation being wielded by the ICC, which required railroads to file every one of their rates with the federal agency. Instead, the Staggers Act had suggested a light-handed form of regulation in which individual rates would be examined when a customer protested them, to determine whether those rates were unreasonable.

Before the birth of the STB, the ICC began implementation of the Staggers Act. They found out quickly that the task of examining individual railroad rates was not easy. And with STB in charge it has not gotten any easier. In fact, it has likely become more complicated still.

The process created by STB to accomplish their mission to relieve railroad customers from being abused by railroad market power has become byzantine and Kafkaesque. This dissertation will explore the details of the byzantine and Kafkaesque process currently in place. Thus, protesting a rate has become difficult, time-consuming, and expensive. Virtually all shippers remain too daunted to pursue such efforts, resulting in almost universal rate-making freedom for the railroads. That is, what the STB currently does can hardly be distinguished from what Edmund Burke had referred to as “benign neglect.” That has resulted in enormous success for the railroads. In addition, it has also resulted in lower prices and better service for railroad customers. Everybody wins.

There are currently attempts to simplify it by strong lobbying efforts to alter laws and rules in the shipper’s favor. Success with such attempts could reverse the remarkable success that the railroads have experienced ever since the Staggers Act had relieved the railroads of oppressive regulation.