Case Study 1 Chapter 5

1
Case Study 1 Chapter 5

• TL LTL Motor Carrier Cost and Production
  Functions

2
Regulations on Motor Carriers

• All economic aspects of industry were regulated
  by ICCstarting in 1935
• Five aspects of regulation
• Carriers classified by products hauled and
  relationship to shipper
• Entry controlsvaried by type of carrier
• Rate controlsspecified when by how much
  carrier rates could be changed
• Changes in structure of industry through mergers,
  acquisitions and consolidations had to be
  approved by ICC

3
Carrier Classification

• Common Carriersserve general public
• Contract Carriersserve specific shippers
• Private Carriershaul own goods
• Brokersfacilitate shipments between carriers
  shippersdo not transport goods
• Exempt Carriersagricultural products,
  newspapers, vehicles used to complement other
  modes (e.g. RR Water), freight forwarders and
  vehicles used to transport people goods in
  connection with air travel

4
Entry Controls

• Common Carriersentrant had to show
• proposed service not being provided by existing
  carriers
• It was fit, willing able to provide service
• Contract Carriersentrant had to show
• It was fit, willing able to provide service
• On entry Certificate of Operation was granted
  which specified
• Route served, type of service, frequency
  commodity
• In both cases, Burden of proof on entrant
• Dual operation as common contract prohibited

5
Change in Motor Carrier Regulations

• No significant changes in economic regulations
  until late 1970searly 1980s
• Evidence began to mount that regulation was
  resulting in inefficiency higher costs
• 1980 MCA specified steps in deregulation
• Relaxed entry controls
• Allowed rate flexibility
• Eased route carriage restrictions
• Allowed for-hire services by private fleets

6
Effects of Regulation on Costs Technology

• Focus on two types of Common Carriers
• Specific Commodity Carriers
• Firms can carry a specific commodity between
  specific locations
• Firms may have multiple COs
• Most shipments are Truck-load (TL) hauls
• Make extensive use of owner-operators who operate
  under the firms COs
• General Freight Carriers
• Serve shippers whose shipments are less than a TL
• LTL carriers have to combine breakdown
  shipmentsneed facilities and terminal labor
• Differences in TL LTL carriers suggest
  different technologies and cost relationships

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Estimating Cost for TL Carriers

• Estimate a translog flexible cost function
• ln C(Tp,o) function of four input prices and
  three carrier characteristics
• C is total cost in 000s and T is ton-miles
• Characteristics represent carriers technology
• Avg. load per vehicle (ald) total
  ton-miles/vehicle miles
• Avg. length of haul (alh) total
  ton-miles/total tons
• Ins cost per ton-mile (ins) ins spending/total
  ton-miles
• Inputs are labor, capital, fuel purchased
  transportation

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Hypothesis 1 CRTS Exists in TL sector

• ReasonTL approximates a competitive industry
• Large number of small firmsplus owner operators
• Small capital requirements
• Ease of entry
• Service is relatively homogeneous after
  accounting for technology differences
• Firms have to reach min LRAC to survive
• Assuming no economies of network size in TL

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Hypothesis 2 Input Prices Positively Related to
Total Cost

• The null hypotheses are
• Further result is
• Each input prices coefficient represents its
  share of total cost
• The sum of shares must equal 1

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Hypothesis 3 ald alh have negative and ins
has positive effect on Total Cost

• Each of characteristics reflect different aspect
  of carriers technology
• Increases in ald implies firm is increasing
  capacity utilization
• Perhaps by reducing empty backhauls
• Reduces avg cost, ceteris paribus
• Increases in alh allows firm to realize economies
  of distance
• Pick-up and delivery costs are spread over more
  ton-miles
• Ins used as proxy for amount of handling costs
  required for shipment
• High-valued, perishable and fragile shipments all
  require more handling and care in loading and
  unloading

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Estimation ResultsTable 5.5

• Goodness of fit stats R2 .99
• All coefficients except alh and ins are
  significant
• alh doesnt appear to affect total costs this
  may reflect
• that the start-end access costs are insignificant
  in total costs
• lack of variation in length of hauls between
  firms
• that route restrictions imposed by ICC made all
  firms operate in an inefficient and costly manner
• Insignificant effect of ins could reflect
• ins is a poor proxy for differences in commodity
  handling cost
• Inter-firm differences in cost are not affected
  by type of goods shipped
• Ald is neg and significantimplies that increased
  capital utilization does significantly reduce
  costs

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CRTS in TL Sector?

• Coefficient for T is .72 implying that RTS
  1.39, which implies IRTS
• Test the null hypothesis
• Reject the null at .05
• Since RTS gt 1, IRTS
• Source of IRTS?
• Been suggested that they are due to regulation
• TL carriers were more restricted in terms of
  goods allowed than in geographic areas allowed to
  serve
• Firms with multiple authorities for goods would
  likely have fewer empty backhauls and thus lower
  LRAC
• In effect, for firms with multiple authorities,
  there are network economies

13
Input Shares and Substitution

• Input price coefficients show proportion of total
  cost represented by each input
• Largest share (39) goes to labor
• Capital accounts for 31, followed by Purchased
  Transport at 18
• The relatively large share for PT suggests the
  importance of Owner-Operators in this sector
• Elasticities of Substitution are all positive
• With exception of PT all are lt 1
• High Elast of Sub for PT indicate that firms
  respond to changes in prices of any of their
  other inputs by utilizing more O-Os

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Summary

• TL sector doesnt appear to operate as a
  competitive industry
• It exhibits IRTS which means some firms are
  operating at lower LRAC than others
• If IRTS are result of regulation, then would
  expect CRTS to emerge if deregulated
• There is substitution among inputs
• Substitution is greatest wrt purchased inputs