THE ROLE OF COST IN THE MINIMUM PRICING OF RAILROAD SERVICES. IN: RAILWAYS

Abstract

This paper presents a statement by ten economists to clarify the economic principles of costs that are relevant as a guide to the pricing of particular railroad services. The statement, concerned with basic concepts of cost, provides some of the essential groundwork for the development of improved techniques for the measurement of relevant costs in specific situations. The authors conclude that incremental costs of a particular service are the only relevant costs in the determination of cost floors as a guide to the pricing of particular railroad services. Rates for particular services should be set at such amounts as will make the greatest total contribution to net income. Pricing which is not restricted by any minimum other than incremental costs can foster more efficient use of railway resources and capacity and can therefore encourage lower costs and rates. The presence of large amounts of fixed costs and unused capacity in railroad facilities makes it especially important that railroad rates encourage a large volume of traffic. Reduced rates that more than cover incremental costs and are designed by management to maximize contribution to net income are not proof of predatory competition. Fully distributed costs derived by apportioning unallocable costs have no economic significance in determining rate floors for particular railroad services. The application of such criterion would force the railroads to maintain rates above the level which would yield maximum contribution to net income and deprive them of traffic for which they can compete economically.