The Beginning of Market Structure: Competition from Railroads

The Beginning of Market Structure Changes: Competition from Railroads

Within a few years of its passage, the Motor Carrier Act of 1980 achieved its goal: to force a change in market structure from a Monopoly to Perfect Competition. Central to the egregious minds of the wealthy capitalists, their real intent behind the Motor Carrier Act of 1980 was to force the change in market structure and this change took the form of dangerous levels of competition. 

Whereas the original Motor Carrier Act of 1935 sought to move control into the hands of the wealthy few by forcing a market structure in the form of a monopoly, once those same wealthy few were no longer interested in maintaining their monopoly they passed a revised version of the same legislation which reversed all of the policies they had enforced for decades. This new Motor Carrier Act of 1980 reversed the monopoly and opened the doors to an outpouring of competition, perfect competition. 

New Competition 

While truckers may have believed that railroads were their biggest enemy at the turn of the century, it seems that the industry left behind by wealthy capitalists in favor of other forms of shippers, rose like a phoenix from the ashes of deregulation to once more derail truckers. 

Harold H. Hall, the chief executive officer for the Southern Railway Company, when interviewed noted that he blamed the trucking industry for not “paying the share that it should of the construction and maintenance costs of the nation’s highways” but by comparison, his railroad tracks have undergone “extensive repairs” and “are in as good condition now as they have been”. This attitude was expressed in part of his favorability for deregulation, indicating that deregulation across the whole of the transportation industries could be profitable for railroads that are considered more well maintained. 

By 1983, the Interstate Commerce Commission allowed railroads to provide trucking services, eliminating the barriers to competition they had, as an organization, fought for before Congress in 1935. Doing so was ostensibly to support railroads but instead flooded the transportation industry with a fire hydrant level of competitive flow. Nelson Cooney, the general counsel for the American Trucking Association, explained that they would ask the Interstate Commerce Commission to reconsider this action and appeal to the United States court of appeals for the District of Columbia because the move removed protections for the trucking industry and watered down what little progress trucking companies were able to make in the previous decades. 

Big trucking companies in spite of recent losses from the economic downturn argued against the increased competition as a burden. Mr. Cooney noted, “the railroads are so big and control so much that they will be an enormous competitive factor. At the rate they’re moving, this could be a free-for-all.” 

When the Interstate Commerce Commission issued a report with their decision they rejected these arguments stating that because the railroad industry which was once the dominant industry, only accounts for 36% of the ton-miles of freight across the nation today, they couldn’t possibly have as detrimental an impact as the trucker’s argued. 

However, the facts speak for themselves. 

The Norfolk & Western Railroad, as one example, obtained a controlling interest in a regional carrier called Piedmont Airlines after which they merged with Southern Railway and have moved toward complete integration of rail services with their airlines. Similarly, Conrail, a government operated freight carrier, began testing vehicles that could travel on railroads, pulled by cars as a way to increase control over the transportation market by providing railroads with a wider reach into other forms of transportation. 

In so doing, these two examples illustrate that predictions from truckers were completely on point: railroads were saturating the market with too much competition by extending their grasp beyond just rail lines.

Predictions Come to Pass

Major trucking companies started to close their doors almost immediately after trucking deregulation went into effect, filing for federal bankruptcy because of a “weakened economy” and “inability to stay profitable”. Specifically, this bankruptcy was often cited as related to the “decline in tonnage”, according to Richard Staley, a senior economist working for the American Trucking Association. 

Truckers attempted to strike, but to no avail. The railroads were able to revive themselves. Transportation stocks lost value, truckers lost jobs. 

These predictions of mass bankruptcy and trucking industry failures because of deregulation came to pass by December of 1983. Over the course of the previous three decades, the trucking industry saw the worst shake out since the Great Depression. 72 freight haulers had to shut down taking 2.2 billion dollars or 16% of the entire industry revenue with them. Several industry leaders accounting for 28% of the industry’s revenue or 3.9 billion dollars, noted significant drops and poor operating ratios from 1980 through 1982. 

Thousands of established carriers and new, low-cost truckers who entered into the business as soon as the Motor Carrier Act of 1980 was passed, have collectively contributed to 32.2% of driver layoffs by the close of 1982. Industry analysts and trucking officials concluded that while the recession did negatively impact the trucking industry, “deregulation was an equal contributor”.   

It was noted that since the Motor Carrier Act of 1980, the number of carriers in operation has increased 40%. In a testimony before Congress, George Zigish, the vice president of the AAA Trucking Corporation said that this decision by the I.C.C. was “ spreading the business thinner and thinner” resulting in “a huge overcapacity problem in the industry.”

In order to combat the overcapacity, existing carriers had to fight for business retention by dropping their freight rates an average of 30% for some companies. Truck loads were less than full more often than ever before. 

While the majority of carriers have succumbed to bankruptcy, the 10 leading carriers have increased their market share by 48.5% as a direct result of oversaturating the market. 

By 1984 it was clear that the I.C.C. was no longer being held responsible for its previously abusive policies for the transportation industry, but was under fire for its mass regulation. The previous move to replace existing members on the Interstate Commerce Committee who were not pushing fast enough for deregulation came to pass as three new members joined the Interstate Commerce Commission in 1983 after which an accord was reached to silence any differences between the current 7 Commissioners for the Interstate Commerce Commission and continue with deregulation. The three new members were referred to in Washington as “deregulation purists” and all three among the original list proposed by Republican Administration officials in response to criticism of slow deregulation by Mr. Taylor for the previous three years. 

New appointees to the I.C.C. brought a particularly brash style of thought with them. A new member of the Interstate Commerce Commission Frederic Andre suggested that the regulatory panel allow convicts to run businesses from jail, and that bribery should be considered “discounts” or “rebates”. He noted that bribes were, “‘probably one of the clearest instances of the free market at work”, a comment Mr. Taylor disagreed with.

Transcripts of private meetings during which time these ideas were shared had Andre’s comments about price fixing as follows: 

”In other words, the fixed rates that I think are socially onerous are when the Government fixes them. But if the I.C.C. were not in the picture, a purely private-sector conspiracy to fix rates has its own built-in forces to counteract it.”

Smaller railroads like the Denver & Rio Grande Western Railroad wanted to remain small but competitive, and yetmergers with larger railroad companies forced small railroads to acquiesce to a murder themselves or remain uncompetitive, representing yet another way that an industry representing only a fraction of the total transportation revenue was eating away at competition for the trucking industry.

Within six years, the Reagan Administration called for the abolition of the Interstate Commerce Commission after it had successfully implemented deregulation demanded by lobbyists and politicians justifying the action by noting we should, “let the market take care of itself” now. This action was supported by one of the Republican-nominated replacement members, Heather J. Gradison who, after joining the Interstate Commerce Commission fought hard for fast deregulation across the transportation industry but agreed that their time had come to an end now that deregulation was in place.

The revised Motor Carrier Act of 1980 had achieved its goal: complete deregulation of the trucking industry and with it, a competitive flood of biblical proportions that saturated the industry so heavily it remained poised to flounder at best. 

This was conducted to force a market structure change from a monopoly to that of perfect competition. Above all else, above the smaller regulations for rates, new companies, and shipping, the Motor Carrier Act of 1980 sought only to change the existing American market structure in favor of those who forced the change alone. 

Detriment of Perfect Competition

Industries are defined by their characteristics, and the trucking industry and transportation industry alike were defined by their predominant characteristics throughout the decades.

Predominant characteristics define monopolistic competition, like that brought about by the Motor Carrier Act of 1935 which legislatively consolidated all output within the transportation industry into the hands of a single firm: the Interstate Commerce Commission. Thereafter, this commission was tasked with restricting entry into and out of the industry and alleviating any specialized information about production techniques. 

In so doing, this monopoly enabled wealthy capitalists who backed the railroad industry at the time to completely control the transportation industry. 

Once those same wealthy capitalists removed their support from the railroad industry and focused instead on other investments, they needed to break down all aspects of the monopoly they had created. 

This was achieved with the Motor Carrier Act of 1980, an iteration of the same act which flipped an industry on its head with a single piece of legislation, converting a monopoly into perfect competition virtually overnight. 

Perfect competition is referred to by economists as atomistic competition and its relation to atomic destruction is fitting. By converting the transportation industry into perfect competition, the characteristics of the industry became the exact opposite of a monopoly by allowing a large number of buyers and sellers, offering homogeneity of shipping, opening the proverbial floodgates for free entry into the market, and eliminating all price control for which the same politicians had fought so hard decades prior. 

Wealthy capitalists understood what the pros and cons would be in either situation and applied political pressure where it suited their pocketbooks most; the most notable characteristic of Perfect Competition is that no seller, no trucking company, was given the luxury of setting their own prices. The Motor Carrier Act of 1935 purportedly offered this freedom by way of the Interstate Commerce Commission, but this was never a luxury placed in the hands of trucking companies. With the implementation of the Motor Carrier Act of 1980, the same politicians, businessmen, and academics who had fought for so long in favor of regulation and price setting (through the Interstate Commerce Commission and its monopolistic hold on the industry) switched sides with impressive speed. Daniel O’Neal Jr,chairman for the Interstate Commerce Commission, was not the only leader who seemed to change his decades-long stance on regulation without reason. The eventuality was that the Interstate Commerce Commission lost its right to a market that existed as a consequence of its decades of flooding. 

Perfect Competition was the intended outcome because it guaranteed that the larger shippers would always have the best prices, no matter what happened to the economy as demonstrated by the hundreds of smaller trucking companies who could only rely on cutting their costs (efficiency) to stay alive. 

Reese H. Taylor, a former chairman to the Interstate Commerce Commission warned from the start that, “it will be awfully hard for smaller trucking companies to stay in business trying to match 50% discounts by the bigger companies. People who worry about entry should realize now that predatory pricing is a big ball game because there cannot be competition if the smaller companies cannot survive.”

These losses for the deluge of smaller trucking companies meant significant financial gains for the top 10 trucking companies which saw almost a 50% increase in profit at the same time as many smaller companies filed for bankruptcy over the years immediately following the passing of the Motor Carrier Act of 1980.

By flooding the market, it was inevitable that the existing market structure would shift or change in such a profound way that the newly developed character-traits or characteristics of the newly changed market would equal Perfect Competition.

Wealthy Capitalists predicted this level of atomistic competition as a result of flooding the market and were poised to profit from it for the long haul. 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *