Description:

Speaker: Jin Yang

Title: "Price Discrimination and Cross-Subsidization in the US Rail Freight Industry"

Abstract:
The US rail freight industry exhibits varying degrees of price discrimination, and economies of scale for serving different shippers within the same railroad network. The combination of these two features allow the railroad companies to cross-subsidize the large and price-elastic shippers by charging the small and price-inelastic shippers an even higher markup. While raising the market power distortion in some market segments, this practice may better align railroads with socially efficient pricing in others. In this paper, I propose an empirical model of shipment demand and supply to quantify how the price of a shipper depends on her marginal contribution to the railroad network, to evaluate these tradeoffs. Using shipment level data, I provide evidence of quantity discounts at both market and individual shipper levels, and discuss how to use them to identify key model parameters. I also argue that certain currently debated counterfactual policies to address the market power problem, such as direct price regulation or introducing competition through banning foreclosures, can reduce the railroads' incentive to efficiently subsidize the marginal shippers, and hence risk increasing the cost for everyone in the long-run.