For many years scholars and regulators have concerned themselves with the problems of regulating industries with firms engaged in rivalry with one another. The problem goes back at least to the turn of the century with rivalry between railroads and pipelines and is particularly difficult when the rival firms both may operate with economies of scale. Yet surprisingly relatively little economic research has been done to show how such an industry should be structured and how tariffs should be set if economic resources are to be allocated efficiently.

Economist and former regulator Alfred Kahn (1970, p. 71) has described the regulatory dilemma in a number of instances, including the rivalry between or among railroads, the competition between telephone and telegraph services, and the interaction between local distributors of natural gas and electricity. As recently as 1981 he wrote that regulators need help “in devising rules that make reasonable economic sense for the regulation of competition between what appear to be natural monopolies” (p. 67).

Elsewhere I have addressed the nature of economically efficient tariffs when there exists rivalry among multiproduct firms that produce imperfectly substitutable outputs with economies of scale and operate under a viability constraint (Braeutigam, 1984). That paper provides a brief discussion of the economic research on the problem suggested by Kahn and develops a general model of the optimal pricing problem, with any number of firms producing any number of products.

This book is a collection of new research papers concerned with the application of modern economic theory and analytical techniques to current issues in transportation economics, especially for many of the systems that are undergoing, or have recently undergone, regulatory change. Two themes unite the chapters of this volume. First, characterization: How should we think about the agents and interactions we see? How should we model carrier technology, shipper demand, network structure, and market equilibrium? Second, policy formation and evaluation: How can we use analytical techniques to examine policies of the past, present, and future? How do we examine the effects of regulation on industry productivity or structure, or the effects of regulatory change on industry competitiveness? All the chapters of this book involve (to varying degrees) these two themes of characterization and policy formation and evaluation.

It is especially easy to thank the appropriate people for their help with this book; the reader need only look at the table of contents to see most of the names that deserve mention. Ronald Braeutigam, Douglas Caves, Ann Friedlaender, Theodore Keeler, Forrest Nelson, Richard Spady, Michael Tretheway, and Clifford Winston all did extra duty by helping in the refereeing/reviewing process for one or more of the chapters. I also especially wish to thank Ann Friedlaender for her early support and ready commitment on this project and Donald McCloskey for his helpful advice at the formative stages of its development.

Since Charles Ellet's insightful analysis of optimal tariffs for a waterway in a competitive environment, a rich and extensive literature has developed involving the application of microeconomic theory and analysis to issues and policies in the economics of transportation, via the use of mathematical and statistical techniques. This book contributes to this literature in three ways. First, all of the chapters are concerned with the analysis of current issues: questions of industry productivity, of economies of density and scale, of pricing and competition, of the structure of technology, and of the prediction of equilibrium. Second, each of these essays endeavors to extend and apply microeconomic theory to its particular issue. This often involves an extension of modeling and statistical techniques in the process. Furthermore, in pursuing this second aspect the authors of the essays have been able to present their research design and methodology in more detail than is usually possible in a journal article. Thus a third contribution is to lower the costs of entry for nonspecialists into this field.

In recent years there has been considerable analysis of the structure of costs and technology of the regulated trucking industry. These studies have generally focused upon the question of economies of scale and the extent to which the industry could be expected to operate competitively in a deregulated environment. Thus, they have primarily concentrated on the questions of industry structure and conduct and performance, with particular attention to rates and service levels.

An equally important aspect of industry performance, however, is productivity. Although this has been largely ignored in analyses of the trucking industry, the implications of regulation for dynamic efficiency and productivity may be just as important as its implications for static efficiency and pricing policies. Indeed, preliminary work in this area by Friedlaender and Wang Chiang (1983) indicates that substantial productivity gains arise through operating characteristics, such as length of haul, that can be affected by regulatory policies dealing with route and operating authorities.

Although previous work has been suggestive, data limitations have prevented a definitive analysis of the sources and nature of technological change in the trucking industry. Without this information, however, it is difficult to determine whether technical change and productivity growth primarily arise from input effects, operating characteristic effects, or output effects, and hence whether regulation can be said to have had a major impact upon productivity growth.

From the earliest days of railroad service, the nature and extent of scale economies in rail operations have provided grounds for ongoing study and debate. Recent attempts to define and quantify scale economies have recognized that it is important to distinguish returns to traffic density from returns to scale (or firm size). Returns to density reflect the relationship between inputs and outputs with the rail network held fixed. Returns to scale reflect the relationship between inputs and the overall scale of operations, including both outputs and network size.

The dominant view is that the rail industry is characterized by increasing returns to density but constant returns to scale. Certainly there are plausible theoretical grounds for this view, and the empirical evidence has been convincing to some observers. For example, in a recent review Keeler (1983) stated: “Studies of railroad costs from the 1970's tell a … consistent story about returns to traffic density. They all give strong evidence of increasing returns, up to a rather high traffic density …” (p. 51 [emphasis added]). He commented that “there are constant or mildly decreasing returns to larger firm sizes, when route density is held constant” (p. 164).

Keeler bases his conclusions primarily on five studies: Caves, Christensen, and Swanson (1981), Friedlaender and Spady (1981), Harmatuck (1979), Harris (1977), and Keeler (1974).

The calculation of an equilibrium is fundamental to the positive analysis of any economic system. In this sense it is no surprise that one would wish to calculate an equilibrium among spatially separated markets connected by a freight transportation system, for that problem is evidently basic to regional and national economic forecasting. When the spatially separated markets of interest are represented as nodes of a network, the freight system infrastructure as links, together with some additional nodes to model modal or carrier junctions and transfer points, and some attempt to capture the complex hierarchy of decisions inherent in freight transportation is made, we refer to this equilibrium problem as the “freight network equilibrium problem.” What is a surprise to the uninitiated is that a theoretically rigorous representation of such an equilibrium and its efficient computation can be quite difficult, and that these are, to some extent, unsolved problems. In this chapter we endeavor to make this last point clear, to review some of the recent advances that have been made and to suggest future research necessary to a complete understanding of freight network equilibrium.

At first glance the freight network equilibrium problem, as we have described it so far, seems essentially the same as the spatial price equilibrium problem discussed in the seminal words of Samuelson (1952) and Takayama and Judge (1971).

An understanding of the structure of technology and the cost-generation process is a necessary step in the analysis of many policy issues. Questions of regulation, deregulation, merger, pricing, and investment all require extensive information on the affected firms' cost and production functions. The recent explosion of interest in issues of deregulation of transportation industries has generated a number of cost analyses of railroads, airlines, and, most recently, motor carriers. The purpose of this chapter is to help further sharpen the emerging image that studies of the motor carrier industry are providing. Our approach will involve emphasizing the heterogeneity of motor carrier technology, the source of the heterogeneity being the spatial context (or environment) within which production takes place. Our main goal is to find a unified and convenient characterization of the subtechnologies, with special emphasis on the role of the spatial environment in generating the subtechnologies.

We proceed as follows. We first pose a family of technologies indexed by a vector of attributes reflecting spatial and market characteristics. We shall see that one way to think of this vector is as a vector of lumpy inputs, some of which may or may not have meaningful notions of markets in which to purchase the lumpy inputs. We then proceed to consider the attribute-indexed cost function dual to the family of technologies.

The purpose of this chapter is to introduce the indexed quadratic (IQ) function and to examine its applications to empirical problems in the econometrics of production, with particular attention to the problem of modeling network technologies. The function in its most general form is a slight modification of a proposal by Baumol, Panzar, and Willig (1982) to construct cost functions as quadratic functions of outputs and to regard the resulting coefficients as concave independent homogeneous functions of input prices. Baumol et al. demonstrated that this formulation is well suited for modeling the technologies of multiple-output firms.

While the techniques developed in this chapter are applicable to a wide variety of industries characterized by network technologies – telecommunications, the postal system, most public utility systems (water, electricity) – the most obvious application is to transportation systems. A leading issue in transportation economics has been the appropriate measurement of output, since most transportation networks are sufficiently complex that an enumeration of outputs by origin–destination combination yields a very high number of ostensibly different outputs, possibly thousands. To distinguish these outputs for the statistical estimation of cost or production functions is infeasible. Moreover, it is not clear that such a treatment would be entirely desirable, since prior information concerning the nature of the relations among the outputs could not be easily incorporated in the estimation procedure; nor would the important network aspects of the technology – which induce the economies of scale and scope that are of primary interest – be perspicuous in the resulting representation.

Introduction

Shipping has been in the domain of the developed world since the earliest days when European sailors braved the uncharted seas in search of new worlds and trade. The Europe-Far East trades became increasingly competitive during the 1800s and that era saw the advent of European dominated shipping cartels called liner conferences. Even the development of the Panamanian flag of convenience was evidence of the United States' entrepreneurial spirit in shipping in the 1920s. Today, for the countries of the developed world, shipping is a mature industry with slow growth, and the focus of many traditional shipowning nations has changed accordingly.

Beginning in the early 1970s, many developing nations aspired to participate equitably in world prosperity and achieve a redistribution of world income; these aspirations culminated in calls by the United Nations for a New International Economic Order. In shipping and trade, the way was paved for the governments of the developing world to undertake fleet promotion strategies as one means of achieving wealth redistribution.

The particular reasons why many developing countries have become interested in fleet promotion are varied but are often related to real or perceived inequalities in the international ocean transport system. This chapter will address these reasons for five of the ASEAN countries and detail the subsequent legislative measures each has taken to promote national flag shipping. Each country has followed more than one course of action, some with a greater degree of success than others; fleet growth and the use of government equity to achieve that growth will be discussed in later chapters. In the last chapter, some comparative comments on the approaches of developing and developed countries to shipping policies will be made.

Singapore

Singapore's shipping policy in general reflects the country's overall government economic policy, which is to promote free enterprise with a minimum of official interference.