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these classifications are published from time to time as called for by additions or amendments, the latest, of course, superseding all earlier ones. Thirty-seven such issues have already appeared in series in trunk lines and southern territory, while fifty have been put forth in western territory, since the practice was standardized in 1888.

187. Competitive Factors in Rate-Making15

BY EMORY R. JOHNSON AND GROVER C. HUEBNER

Railroad rates are, to a large extent, the resultant of competitive forces. In part the competition is of carriers with each other for traffic free to move by more than one line; and, in a still larger way, the competition is between industries and among rival producing or trading centers and sections. If a railroad company is to prosper, the industries along its lines, the section of country it serves, and the markets it reaches must flourish.

In determining the rates which the traffic will bear, the General Freight Agent is influenced by many factors. The strongest force is that of competition among markets, or "of interregional, industrial competition." The asphalt of California, for example, competes against that of Texas, the West Indies and South America, in American cities, and railway rates on the California product must be fixed so as to give a wide sale. Likewise the rates on cotton goods from southern mills are made so as to allow them to find a market side by side with the output of New England mills. Innumerable instances of interregional competition in manufacturing might be cited. The finished product must be carried to market in rivalry with similar goods from other sections, while raw products and coal must be hauled to the factories at rates which will allow all industries to thrive. Were there no indirect bidding of one railway for the traffic of another, this all-pervading competition between producing regions would still exert a constant regulative pressure upon the level of rates.

Among the markets themselves the same forces of commercial competition are effective. The Gulf ports compete with the North Atlantic ports for the grain exports of the West, and the North Atlantic ports strive with each other for this trade. The Gulf ports struggle with those of the South Atlantic for the cotton of the interior; New Orleans is the rival of Galveston.

15 Adapted from Railroad Traffic and Rates, I, 351-359. Copyright by D. Appleton & Co. (1911).

It is chiefly because of the force of commercial competition that freight rates are to a large extent interdependent. To change an unimportant rate may require the modification of but a few others, but to raise or lower the rate on wheat from Chicago to New York may require the readjustment of many other charges. The rate structure, like a spider's web, is delicately interwoven.

Rival markets and competing producing sections, no matter where located, will be kept on a common level, if it is possible for the carriers to so place them. At the present time the railways as well as the public realize that artificial limits must often be placed upon interregional competition.

The efforts of rival railways to secure traffic free to move by more than one line is a second force influencing the rate maker. Unlike the commercial competition just mentioned, it has become less instead of more powerful; because, as time goes on, it is more largely regulated by the consolidation of competing lines, or by traffic associations, community-of-interest arrangements, and informal mutual understandings. These are the means whereby rival railways have sought to substitute coöperation for unrestrained competition. This fact is well illustrated by the perennial strife of the trunk lines over the relative rates to be accorded North Atlantic seaports on a traffic to and from the central West.

The fact that the competition among railroads is in service rather than on the basis of secret rates enables the railways to regulate their struggles so as to prevent most, if not all, rate wars; but regulated competition that stops short of open war may not only be perpetual, but may also be keen, and may be effective in determining both the charges on particular commodities and the general level of rates. From the public point of view, this interrailway competition may not be an adequate regulator of rates; indeed, it may, like interregional industrial competition, lead to arbitrary discriminations that require correction by public authority; but this does not prove the absence or impotency of competition among railroads to secure traffic free to move by more than one route.

The influence of water competition upon the policy and practice of railway rate making, though less general and less controlling now than formerly, is still a factor of much effect in several parts of the country; and the practical certainty of a general improvement of the inland waterways of the United States indicates that water competition will be more potent in the future than it is at the present time.

The rail charges into and out of the Southern States and the system of rates that has developed in that section, are largely influenced by the competitive rates and service of the coastwise vessels. Likewise the rates on the transcontinental traffic moving west and east between the Atlantic and Pacific sections of the United States are absolutely controlled by the competition of the water routes via Panama and the Isthmus of Tehuantepec. Moreover, it should be specially noted that water competition not only controls certain specific railway charges, but also exerts much influence upon the general systems of rate making prevailing in different sections of the country.

Railway rates in the future will probably be increasingly subject to the regulation of waterway competition.

188. The Futility of Costs as a Basis for Rates16

BY SYDNEY CHARLES WILLIAMS

The theory of price-determination according to cost of production is usually interpreted to mean that the price of each unit is determined ultimately by the cost of production of that unit. Where the unit is large and simple, e. g., in the case of a boat constructed entirely by hand by one man, the only items of expense will be the material, the man's labour, and some trifling sum to cover the cost and wear and tear of his tools; and the price he will ask will be determined accordingly. Modern industrial conditions, however, are much more complicated. A factory or workshop will turn out very many units of many different kinds; involving raw material of varying values, processes of all kinds, simple and elaborate, machinery and labour of many sorts, and each unit of each kind must bear some proportion of those general charges which cannot be attributed to any one class of product, but must be borne by the whole.

Now to what extent is it the case that the price charged for each unit of railway transport is determined by the cost of producing that unit? At first sight it may seem a very simple and satisfactory method of arriving at railway charges. The commodity produced is one-and its cost per unit can be arrived at, and the price to be charged fixed accordingly. But this seeming simplicity is very far from being present in reality. For when we begin to think of concrete instances of railway transport we see that they include commodities very diverse indeed. There are in the first place very

16 Adapted from The Economics of Railway Transport, 189–198 (1909).

many kinds of haulage, pure and simple-for long distances, medium distances, and short distances, with a cost per mile varying according to the distance; there is haulage of all kinds of goods, from coal and limestone to fruit, flowers, dynamite, and cigars, and of all manner of passengers, from a Royal party in a special train, or first-class express traffic to the Scotch moors, to workmen's journeys at 12 miles a penny or half-day seaside trips at similar low charges; there are also many subsidiary services sometimes given, sometimes expressly withheld-cartage, delivery, liability for damage or loss, refrigeration, use of company's wagons, express speed or slow travel, and so forth. In short, we see that the use of the purely abstract word "transport" gives a quite misleading air of simplicity to what is really a congeries of operations of the most diverse kind. Railways in fact produce a far greater variety of commodities than most industrial undertakings.

But it may be urged, this does not demonstrate the impossibility of basing your railway charges on respective costs of production. This may be done in one or other of two ways. The first and most obvious method is to classify your different services and apportion to each the peculiar expenses connected with it. Then take the whole of the remaining expenditure of a general kind and apportion that among the different services according to their respective prime costs. You will now know the expenditure involved by each service, and as you know the extent of this traffic you will be able to fix a fair and reasonable charge which will just give you your expenditure with a reasonable margin of profit.

If the matter is so simple it should be child's work to apply it to the first great division of railway work, that between passenger and goods traffic. The simplest and clearest subdivision of railway working expenditure is as follows: General Charges, Ways and Works, Rolling-Stock, Traffic Department Expenditure.

Now of all these a good deal is not merely independent of any particular kind of traffic but is independent of traffic altogether. Among such heads of expenditure are directors' fees, the salaries of the managing and legal staff, the rates and taxes paid, the greater part of the cost of maintenance of way and works, and some part of the traffic working expenses. These items clearly cannot be directly connected with the respective amounts of goods or passenger traffic. The cost of passenger and goods locomotives and rolling-stock can, however, be so allocated; so also the cost of their respective train-staffs; and some part of the expenditure of buildings. Indeed, the very variety of methods adopted to secure this allocation themselves testify to the difficulty of the operation ;

The rail charges into and out of the Southern States and the system of rates that has developed in that section, are largely influenced by the competitive rates and service of the coastwise vessels. Likewise the rates on the transcontinental traffic moving west and east between the Atlantic and Pacific sections of the United States are absolutely controlled by the competition of the water routes via Panama and the Isthmus of Tehuantepec. Moreover, it should be specially noted that water competition not only controls certain specific railway charges, but also exerts much influence upon the general systems of rate making prevailing in different sections of the country.

Railway rates in the future will probably be increasingly subject to the regulation of waterway competition.

188. The Futility of Costs as a Basis for Rates1

BY SYDNEY CHARLES WILLIAMS

The theory of price-determination according to cost of production is usually interpreted to mean that the price of each unit is determined ultimately by the cost of production of that unit. Where the unit is large and simple, e. g., in the case of a boat constructed entirely by hand by one man, the only items of expense will be the material, the man's labour, and some trifling sum to cover the cost and wear and tear of his tools; and the price he will ask will be determined accordingly. Modern industrial conditions, however, are much more complicated. A factory or workshop will turn out very many units of many different kinds; involving raw material of varying values, processes of all kinds, simple and elaborate, machinery and labour of many sorts, and each unit of each kind must bear some proportion of those general charges which cannot be attributed to any one class of product, but must be borne by the whole.

Now to what extent is it the case that the price charged for each unit of railway transport is determined by the cost of producing that unit? At first sight it may seem a very simple and satisfactory method of arriving at railway charges. The commodity produced is one-and its cost per unit can be arrived at, and the price to be charged fixed accordingly. But this seeming simplicity is very far from being present in reality. For when we begin to think of concrete instances of railway transport we see that they include commodities very diverse indeed. There are in the first place very

16 Adapted from The Economics of Railway Transport, 189-198 (1909).

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