An empirical examination of market access.

• Author: Wilson, Wesley W.
• Position: Case study of trucking industry

1. Introduction

   The Motor Carrier Act of 1980 significantly deregulated the trucking industry, reducing the cost of obtaining operating authority (the right to transport regulated commodities) to a relatively low level. Research by a number of authors(1) suggests that relaxed regulatory controls and greater pricing flexibility have dramatically enhanced competitiveness and productivity in the industry. Recent survey evidence, however, also indicates that a high proportion of truckers do not possess operating authority.(2) A preponderance of firms that choose not to obtain operating authority is consistent with two competing views of the importance of the remaining regulatory barriers to entry in trucking.

   One view is that because barriers to entry are now trivial, the advantage to possessing operating authority has been reduced through competition to an insignificant level, and so many trucking firms do not bother to obtain operating authority. The alternative view is that, although the costs of possessing operating authority were greatly reduced by deregulation, they are still substantial. The large number of firms that choose not to obtain operating authority are those for whom the "rents" associated with the possession of operating authority are insufficient to cover the costs, which include compliance costs and the disutility of dealing with a regulatory agency.(3)

   A central objective of this study is to formalize the two explanations just described and to determine which, if either, can be supported empirically. Ascertaining which explanation is correct is important because it represents a necessary first step in evaluating the effects and desirability of further deregulation of the motor carrier industry. In a broader context, this study contributes to assessing the success of efforts to restore competitiveness and efficiency through partial deregulation.

   Most existing studies of entry regulation focus on the rents that accrue to firms in regulated industries.(4) In contrast to these studies, we examine the effects of regulation on capacity utilization. Capacity is underutilized when a trucker travels empty on one leg of a round-trip.(5) Accordingly, the theoretical model that motivates the empirical tests is one of joint production; firms serve multiple markets under conditions of cost complementarities. While this approach is not unique to the present study,(6) the introduction of entry regulation into this model of joint production is, to the best of our knowledge, novel.(7) In previous studies, unloaded trips (capacity underutilization) occur when prices on one leg of the trip are bid to an excessively low level. In our model unloaded trips can occur in the absence of "demand imbalances" sufficient to cause an excessively low price on one leg of a trip. Rather, underutilization may be the result of spillovers from regulated markets into non-regulated markets.

   The two opposing views about the importance of remaining ICC regulation for the trucking industry discussed earlier can be recast in terms of capacity utilization. If the barriers to entry in the trucking industry are now trivial, and the advantages to possessing operating authority insignificant, then the decision to travel empty is an optimal choice that can, in principle at least, be explained by firm attributes other than the possession of operating authority. If, on the other hand, regulation still poses significant barriers to entry, the possession of operating authority should be significant in explaining the decision to travel empty even after accounting for other firm attributes such as size, experience, talent, and location (the attributes included in this study).

   In assessing the influence of ICC entry regulation under joint production we employ a unique data set. The data pertain to truckers that travel in round trips, but who may choose to serve only one leg of the round trip. On the outgoing leg firms haul unprocessed agricultural commodities that are not subject to regulatory restrictions. On the return leg firms may haul commodities subject to regulatory restrictions or compete for a relatively small set of commodities not subject to regulatory restrictions. However, firms often choose not to serve the return market, and the dependent variable in the empirical model is the proportion of the trips that are loaded in the return market. This proportion is explained in terms of the regulatory status of the firm and other firm attributes including size, experience, talent, and location. These data are the only data, to our knowledge, that pertain to firm decisions on round trips where one leg does not require operating authority and the other leg does. Therefore, more than any other data available, these data provide an excellent opportunity to evaluate the effects of entry restrictions under conditions of joint production.

   Estimates of the empirical model show that even after controlling for firm attributes such as size, experience, talent, and distance, regulatory status significantly influences the decisions of firms to travel empty. Thus we find the evidence to be consistent with the view that the barriers to entry in the motor carrier industry remain substantial and significantly effect resource allocation by causing underutilization of capacity.

2. Theory

   In the theory developed here a unit of capacity is a round trip. Price-taking firms provide capacity by traveling in round trips between two markets labeled the fronthaul (f) and the backhaul (b). The cost of supplying capacity C(T) is the cost of supplying T round trips without being loaded on either leg. A unit of capacity (a round trip) can be used in the fronthaul or the backhaul markets after incurring "access" costs of [a.sup.f] and [a.sup.b]. Access costs are the incremental costs of finding and delivering a load.

   Facing prices [P.sup.f] and [P.sup.b], firms choose the level of capacity (T) and the particular set of markets to serve. Let [delta.sup.f] be a binary variable that takes a value of one if the firm serves the fronthaul market, and a value of zero otherwise; [delta.sup.b] is defined similarly for the backhaul market. There are four possible outcomes of ([delta.sup.f], [delta.sup.b]) including the firms choosing to serve: 1) both markets (1,1); 2) only the fronthaul market (1,0); 3) only the backhaul market (0,1); and 4) neither market (0,0).

   At a minimum, the market price (i.e., the revenue received on any one leg of a round trip) must compensate access costs before a particular market receives service. Hence, [P.sup.f] [greater than or equal to] [a.sup.f] and [P.sup.b] [greater than or equal to] [a.sup.b] are necessary conditions for the firm to access the fronthaul and the backhaul market. We define these conditions as the "market access conditions." Let [phi] be the set of satisfied market access conditions. Then the firm's profit maximization framework can be written

   [Mathematical Expression Omitted]

   The first order condition determining the level of capacity is

   [Mathematical Expression Omitted]

   For service to be provided at least one of the market access conditions must be satisfied. Net round trip revenues, [sigma.sub.iota.][element of][phi] ([P.sup.i]-[a.sup.i]) must compensate marginal capacity costs. Round trip revenues consist of both fronthaul and backhaul revenues (case 1), fronthaul revenues only (case 2), or backhaul revenues only (case 3). If net revenues from the round trip do not compensate marginal capacity costs at any level of service, then no service is provided (case 4).

   The results are illustrated in Figure 1. In case 1, the market access condition for each market is met. Access costs are covered, and the two markets together compensate marginal capacity costs. The firm, therefore, serves both markets and provides a capacity level of [T.sub.i.sup.*]. In case 2, the market access condition holds for the fronthaul market ([P.sup.f.sub.1] [greater than or equal to] [a.sup.f.sub.1]), but not for the backhaul market...