COLLECTIVE RATEMAKING A VICTIM OF TRADITIONAL by gegeshandong

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									 COLLECTIVE RATEMAKING: A VICTIM
    OF TRADITIONAL ANTITRUST
            DOCTRINE?

                                  H.   MICHAEL MANN*



                                       INTRODUCTION

   The Motor Carrier Act of 1980 (MCA) t abolishes antitrust immunity
for single-line collective ratemaking as of January 1, 1984, pending a
report of the Motor Carrier Ratemaking Study Commission. 2 One com-
mentator predicts that the implementation of this provision also will end
                                           3
collective action to set joint-line rates.
   Economists involved with antitrust issues believe that it is axiomatic
to applaud cessation of collective price determination. For example,
Thomas Moore has stated, "Collective ratemaking is inherently an-
ticompetitive. Since the days of Adam Smith, economists have recog-
nized that collusion among competitors in setting rates will inevitably
lead to higher rates. Our antitrust laws have long recognized that the
most monopolistic practice possible was colluding on prices."'4 This po-
sition presumes that collective price setting benefits producers and
harms customers. It therefore is surprising to learn that associations rep-
resenting shippers, the customers of motor carriers, openly support col-
lective action in ratemaking. These groups, including the National
Industrial Traffic League (NIT League), the National Small Shipments
Traffic Conference (NASSTRAC), the Drug and Toilet Preparation
Traffic Conference (DTPTC), and the Eastern Industrial Traffic
League, represent a large number of shippers, which vary in size and by
the kind of products shipped. 5 The volume of traffic involved is sub-

      * Professor of Economics, Boston College. B.A., 1956, Haverford College; Ph.D., 1962, Cor-
nell University. The author appreciates the assistance and cooperation of William Klitgaard and
William Tye in the preparation of this Article.
      1. Pub. L. No. 96-296, 94 Stat. 793 (codified in scattered sections of 49 U.S.C.).
      2. Se 49 U.S.C. § 10706(b)(3)(d) (Supp. IV 1980).
      3. Kenworthy, Antitrust Cotsidraiont in Motor Carrier Ratenaking--Rate Bureau Operations and
A/ternativer, 11 TRANSP. LJ.65, 84-86 (1979).
      4. T. Moore, Testimony Before the Motor Carrier Ratemaking Study Commission 3 (Mar.
19, 1982).
      5. NIT League opinions were expressed at the November 1981 hearings of the study commis-
394                THE AMERICAN UNIVERSITY LAW REVIEW                              [Vol. 32:393
stantial. 6 Collective ratemaking, therefore, has far-reaching
implications.
   Proponents of Thomas Moore's position might react to the position of
these Associations on collective ratemaking in one of two ways. They
would either assert that the shippers' representatives fail to understand
their constituents' own best interests or, alternatively, assume that some-
thing sinister is involved, such as a joint conspiracy of the carriers and
the shippers to exploit receivers of tlhe shippers' goods. Microeconomic
teaching over the past several years; however, has begun to stress that
there may be gains in efficiency from behavior that old antitrust doc-
trine condemned as anticompetitive in purpose and effect.

                            I.   BEHAVIOR AND EFFICIENCY
   Assume that behavior exists that will raise price above a competitive
level and simultaneously reduce the cost of the output produced. In
such a situation, the question is whether it is in society's interest to per-
mit such behavior. Economists would respond by asking whether the
gain from the cost reduction exceeds the loss from the price increase.
Geometrically, the problem is depicted as follows:




sion. Richard Velton voiced the position of both the NASSTRAC and DTPTC at the same hear-
ings. See R. Velton, Testimony Before the Motor Carrier Ratemaking Study Commission (Nov. 18,
 1981). These associations believed that antitrust immunity for single-line collective ratemaking
should continue beyond the date set for its abolition by the MCA. They further asserted that the
statute should contain a provision allowing released value rates to be made or revised by the rate
bureaus. Id at 2. The Eastern Industrial Traffic League also supported the retention of collective
ratemaking. See F. Bauer, Testimony Before the Motor Carrier Ratemaking Study Commission
(Mar. 19, 1982). Other shipper groups have voiced their support via the press. See, e.g., Colleclive
Ratemaaking by Single Lines Should be Continued-S outhern Shiiper and Motor Carrier Council, TRAFFIC
WORLD, Nov. 2, 1981, at 79, col. 2.
      6. As an example, in the Middle Atlantic Conference (MAC), 8.8 million class-rate ship-
ments moved under MAC tariffs. See Continuing Traffic Study Report No. 24 (Oct. 1980).
1983]                         COLLECTIVE RATEMAKING

                                             FIGURE 1




                 -------------      a
            Pt                     I         b                                           C1

                     G                  ct            d                                  C2

                                                 c2                  D




            0
                                  q2         qI

It is possible to posit a situation in which some action on the part of
producers raises price from _P, to P2 and at the same time lowers cost
from C, to C. The triangle, L, represents a social loss because buyers
value the output, q.,q,,, more highly than the cost of making it avail-
able-area q~abq, is larger than q:c q, The rectangle, G, represents a
                                                                      7
social gain because Oq2 is now produced more cheaply than before.
Depending on the value of the price elasticity of demand and whether
the price change starts from a competitive level-,-C, in the diagram
above-various relationships can be derived between L and G It can
be demonstrated, however, that the cost reduction can be considerably
smaller than the price increase and that G will exceed L "under a wide
range of conditions.""8

                       II.   THE TRADEOFF Loss EXAMINED
   Two questions arise with respect to collective ratemaking. First, are
there gains in efficiency from collective ratemaking such that, even if it
is true that collective behavior permits price to be above the competitive

     7. This line of argument first was advanced with regard to horizontal mergers. Set William-
son, Economes as an Antitrast Defense.- The Wefare Tradeo, 5A.EONRV.8(16). For an-
other version and discussion of the model, see Liebeler, Mfarket Fower and Comptetitive SupOeromitp   in
ConcentratedIndusties, 25 U.C.L.A. L. RE.V. 1231, 1260-71 (1978). Seet also Williamson, Economaiesas an
dnthrust Defense Revisited, 125 U. PA. L. RE~V. 699 (1977). It is interesting to note that although the
merger guidelines recently issued by the Department of justice and the Federal Trade Commission
recognized the legitimacy of the tradeoff issue, the recommendations also recognized the existence
of operational problems associated with implementation in actual antitrust litigation.
     8. A. Fisher & R. Lande, Efficiency Considerations in Merger Enforcement, Working Draft
48 (F.T.C. 198 1). A comparison between G and L ignores the distributive effect of the noncompeti-
tive price rectangle PIPga c.,, Were that to be considered as part of L, the conclusion concerning
the relative relationship between the cost and price changes would have to be modified.
396                THE AMERICAN UNIVERSITY LAW REVIEW                              [Vol. 32:393

level, the tradeoff favors continuance of collective price setting? Second,
does the MCA ensure that noncompetitive pricing will be so unlikely
that any gain in efficiency, no matter how small, from collective action
is socially valuable? These two questions merit serious consideration.
   The findings of one study indicated that shippers expect the abolition
of collective ratemaking to lead to individually established rates as well
as to great difficulty in arranging interline shipments. Shippers antici-
pate that the former consequence will place greater burdens on trans-
portation managers and individual shippers to determine the "best" rate
for the movement of their product and will require more extensive au-
diting of freight bills and carrier performance. 9 They further believe
that the latter effect will lead to interline movement through a combina-
tion of local rates, requiring new papers at each interchange. This in
turn will cause great uncertainty about which, if any, carrier will assume
responsibility for the timely delivery of the complete shipment ordered
                  0
by the receiver.1 These concerns form the basis of the expectation that
"transaction costs" inevitably will rise in the absence of collective
ratemaking.
   No specific estimates, however, exist on the potential magnitude of
the cost increases that most likely will follow the abolition of collective
ratemaking. Nevertheless, two considerations suggest that the absence
of such information is not a ground for ignoring the issue. Rather, they
indicate that a serious effort must be made to estimate the likely magni-
tude of the cost change.
   The first consideration is conceptual. The following table measures
the percentage cost change necessary to offset a specified percentage
change in price for different estimates of the price elasticity of
demand. 1'




      9. St P. Roberts, Testimony Before the Motor Carrier Ratemaking Study Commission 1-2
(Mar. 18, 1982).
     10. For a detailed explanation of this effect, see H.L. Cook, Testimony Before the Motor
Carrier Ratemaking Study Commission (Jan. 29, 1982).
     11. This table is based on a linear demand ctirve and a price change that starts at the compet-
itive level.
1983]                           COLLECTIVE RATEMAKING

                                           TABLE 112

         PERCENTAGE COST DECREASES NECESSARY TO OFFSET A
                  GIVEN PERCENTAGE INCREASE IN PRICE FOR
                     ALTERNATIVE PRICE ELASTICITIES OF
                                          DEMAND (N)
Increase
In Price                                                  Elasticity
   (%)                     N=3                    N=2                   N=1                    N=1/2
     5                       0.44                  0.27                 0.13                    0.06
    10                       2.14                  1.24                 0.55               .    0.26
    20                      15.00                  6.66                 2.49                    1.11
    30                     135.00                 22.49                 6.42                    2.64
   This table demonstrates that the percentage cost decrease necessary to
offset the social loss from a given percentage price increase becomes sub-
stantial only when the price change is large and is combined with high
price elasticities.1 3 Supporters of traditional antitrust doctrine believe
that the costs of collective ratemaking necessarily outweigh any social
gain. The accuracy of this thesis depends on three presumptions: First,
that price elasticity for trucking is high; second, that rate bureaus have
unfettered power to increase price substantially; 14 and third, that collec-
tive ratemaking can only decrease costs minimally. Various studies have
contradicted the validity of the first two assumptions,' 5 and demon-
strated the need for additional documentary evidence. Because conven-
tional antitrust doctrine regarding rate bureaus has been called into
question, the tradeoff issue deserves serious attention.
   The second consideration is derived from the experience with released
rates.1 6 The MCA removed the authority of the Interstate Commerce
                                             7
Commission (ICC) to approve such rates.1 Furthermore, Congress abol-
ished antitrust immunity for collectively determined released rates, ef-

    12. A. Fisher & R. Lande, supra note 8, at 40, diagram IV-2.
    13. One analysis of own-demand price elasticity for all trucking found variation across regions
and across different kinds of commodities. The highest elasticity estimate was less than two, with
the majority falling close to one. A. FRIEDLAENDER & R. SPADY, FREIGHT TRANSPORTATION REG-
ULATION 55, table 11-10 (1980). Neither the Friedlaender and Spady study nor other studies re-
viewed estimate elasticities according to the kind of service. The table in the text, however,
indicates that collective ratemaking need only generate relatively small savings in transaction costs
to offset more substantial price increases.
     14. This is true even if the price increase were to start from a level that was already above the
competitive one. A. Fisher & R. Lande, supnra note 8, at 45, table IV-3.
     15. See, e.g., A. FRIEDLAENDER & R. SPADY, .fupra note 13, at 55, table 11-10 (maximum
elasticity of two). For a discussion of the rate bureau's discretionary pricing constraints, see infra
notes 21-24 and accompanying text.
     16. A released rate is "a device for limiting a carrier's liability on a category of commodities
having a wide range of values." See W. Augello, Testimony Before the Motor Carrier Ratemaking
Study Commission 2 (Mar. 19, 1982).
     17. 49 U.S.C. § 10730 (Supp. IV 1980).
398                THE AMERICAN UNIVERSITY LAW REVIEW                               [Vol. 32:393

fective July 1, 1980.18 This has resulted in a virtual cessation in newly
negotiated released rates.1 9 One possible explanation for this occurrence
is that individually negotiated rates between shippers and carriers are
much more costly to implement than collectively set rates.20 Thus, the
question becomes whether it is coincidence that the marked reduction in
the use of released rates occurred subsequent to the elimination of anti-
trust immunity. The answer can be found only after a marshalling of
evidence concerning the efficiency of collective versus individual price
setting. Absent this knowledge, policy will be made based on nothing
more substantial than the assertion that the only consequence of collec-
tive ratemaking is an anticompetitive effect on price. Reliance on such
an assumption might 'prove to be very costly, particularly if a price in-
crease above the competitive level is unlikely.

                      III.    THE EXISTENCE OF A TRADEOFF?
   If rate bureaus are unable to set prices above the competitive level,
then even a minimal gain in efficiency from collective rate setting would
improve the performance of the trucking industry. Despite the situation
prior to 1980 and the passage of the MCA, certain indicators suggest
that price competition currently is vigorous. First, the number of appli-
cations requesting permanent authority to operate within given markets
has more than tripled, from 6746 applications in 1976 to 22,235 applica-
tions in 1980.21 The percentage of applications approved in 1976 was
69.8; by 1980 it had increased to 97.4.22 These statistics demonstrate
that entry is now virtually assured.
   Second, carriers are filing an increasing number of independent ac-
tions through eight truck rate bureaus. These actions permit a carrier to
establish its own tariff independently of the bureau's rate. Data culled
from two large general commodity rate bureaus indicate that discounts

     18. Id § 10706(b)(3)(C).
     19. In his statement to the Commission, Mr. Augello stated that collective ratemaking is the
only practical method of achieving industry-wide released rates. See W. Augello,supra note 16, at 3.
In separate letters to Representative James J. Howard, the Trucking Association of America (TAA)
and the NIT League also raised this complaint. The NIT League asserted that use of individually
negotiated released rates has "been virtually nil." See Transport Topics, May 17, 1982, at 2, col. 3.
Similarly the TAA stated that "instead of encouraging the negotiation of new released rates by
shippers and their individual carriers, the removal of antitrust immunity has brought such negotia-
tions to a virtual standstill." Se id at col. 2. The TAA letter was also signed by representatives of
the American Trucking Association, the Shippers National Freight Claim Council, the National
Motor Freight Traffic Association, NASSTRAC, and the DTPTC. Id at col. 3.
    20. Id at 4.
    21. OFFICE OF POLICY & ANALYSIS, INTERSTATE COMMERCE COMM'N, TIE EFFECT OF
REGULATORY REFORM ON THE TRUCKING INDUSTRY: STRUCTURE, CONDUCT AND PERFORM-
ANCE 3 (1981) (preliminary report) [hereinafter cited as I.C.C. PRELIMINARY REPORT]. This trend
apparently is continuing. This source further states that during the first half of 1981, applications
totaled 14,096, of which 95.7% were approved.
     22. Id
19831                          COLLECTIVE RATEMAKING

from the posted rates make up 95% of the independent actions. 2 3 Third,
ease of entry apparently has contributed to the substantial reduction in
the capitalized values of operating rights. During 1980 and 1981, the
100 largest carriers wrote off $431.5 million in unamortized operating
rights. The combined total for all Class I and II carriers was $774.4
million.24 These three factors suggest that collective rate setting by the
bureaus is not producing a noncompetitive price outcome.

                                         CONCLUSION

   Those who adhere to traditional antitrust doctrine will assert that, as
depicted in Figure 1, collective ratemaking can only raise price to point
a. The sole effect from this will be a social loss. If, however, collective
price setting reduces costs from C, to C2, it is possible that even if price
increases, there will be a net social gain such that point a will be supe-
rior to point b. Finally, if bureaus, in the present climate produced by
the MCA, cannot raise prices above the competitive level, point d may
be achieved, a result superior to either a or b. Determining which of
these alternatives will occur-including whether point d can be ob-
tained through a system that matches the alleged efficiencies of collec-
tive ratemaking without risking any anticompetitive consequences-
requires careful analysis. Although several divergent viewpoints exist
regarding the potential effects of collective ratemaking, 25 any final de-
termination awaits a comprehensive study of the comparative conse-
quences of collective and individual ratemaking.




     23. RatemakingPanelHearsSupport End to Antitrust Immunity, TRAFFIC WORLD, Nov. 23, 1981,
                                          for
at 35.
     24. I.C.C. PRELIMINARY REPORT, supra note 21, at 6.
     25. For an example of contrasting opinions on collective ratemaking and social efficiency,
compare Friedman, Collective Ratenakingby Motor Common Camrs: Economicand PablicPoli9 Considera-
tions, 10 TRANSP. L.J. 33 (1978) (public gain to regulatory process from collective ratemaking) with
Miller, Collective Ratemaking Reconsidered."A Rebuttal, 11 TRANSP. L.J. 291 (1980) (collective ratemak-
ing in trucking runs contrary to public policy).

								
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