Switch it: Canadian rail regulations, Ramsey pricing, and potential implications for U.S. rail policy

Abstract

Like the Surface Transportation Board (STB) in the United States, the Canadian Transportation Agency (CTA) is the regulatory body governing the rail sector within Canada. Due to possible policy relevance, we examine the CTA’s regulated zonal interswitching (broadly equivalent to reciprocal switching in the U.S.) rates from the perspective of Ramsey (second best) pricing. Interswitching in Canada is intended to promote inter-rail competition when two or more railroads are proximate to each other and the shipper. Using Canadian waybill data and associated pricing parameter estimates as input into a numerical simulation, we examine extant Canadian interswitching rates in comparison to Ramsey rates, assuming each zonal rate corresponds to a distinct level of shipper demand. We find that recent Canadian interswitching rates are not far off of comparable Ramsey prices. Regarding U.S. policy, our findings imply that Ramsey pricing principles could still be used to set reciprocal switching access rates that would be economically justifiable to both shipper and carrier.