1. Class 6 Network Industries, Winter, 2014 The Express Cases
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Class 6 Network Industries, Winter, The Express Cases
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. Natural Monopoly: Production and Cost Function
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Natural Monopoly: Production and Cost Function
Available to anyone
Given by: cq + K
q is quantity of good produced
c is the cost of producing one unit of each good (marginal cost)
K is fixed cost of production
A producer must pay K regardless of how much of the good is produced
Idea: An entry fee to get into the business
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3. Natural Monopoly: Production and Cost Function
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Natural Monopoly: Production and Cost Function
A producer must pay K regardless of how much of the good is produced
Idea: An entry fee to get into the business
How many firms would an all-powerful social planner have?
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4. Understanding Natural Monopoly
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Understanding Natural Monopoly
Production Cost Focus: One Firm
Any quantity of the good can be produced at the lowest cost by having a single firm
The costs of producing each unit of the good is the same regardless of the number of firms (fixed marginal cost of production)
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5. Understanding Natural Monopoly
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Understanding Natural Monopoly
Two firms = two entry fees (2K) and the second entry fee is wasted
We might see that this cost function creates a natural monopoly
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6. Understanding Natural Monopoly
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Understanding Natural Monopoly
Competition Focus: More than One Firm?
Prior example makes clear that monopolist will reduce output with deadweight loss
All-powerful social planner needs to control exercise of monopoly power
Does this through regulation
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7. Understanding Natural Monopoly
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Understanding Natural Monopoly
Natural Monopoly and Regulation
This production function provides natural basis for single-firm situations with regulations controlling exercise of market power.
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8. Natural Monopoly and Entry
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Natural Monopoly and Entry
Situation
Suppose that we have one firm producing with this cost function and no regulation.
Will other firms enter?
Put differently, does this production function give rise to monopoly at all?
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9. Natural Monopoly and Entry
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Natural Monopoly and Entry
Answer
It depends on what the entrant believes will happen
Three Scenarios
The Tough Incumbent
Price Competition
Quantity Competition
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10. No. 1: The Tough Incumbent
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No. 1: The Tough Incumbent
Entrant believes that Incumbent monopolist will slash prices to c, marginal cost, in response to entry
Will E enter?
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11. No. 1: The Tough Incumbent
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No. 1: The Tough Incumbent
Answer
No, just covers marginal costs, and loses fixed cost of K
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12. No. 2: Price Competitors E believes and E and I will compete on price
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No. 2: Price Competitors
E believes and E and I will compete on price
More precisely, an outcome of their interaction will be a situation in which E is happy with her price, given I’s price, and vice versa.
Will E enter?
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13. No. 2: Price Competitors Answer Probably not.
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No. 2: Price Competitors
Answer
Probably not.
Most natural outcome of this process, called Bertrand competition, is P = c.
Lowering prices slightly diverts the entire market to the seller and increases profits.
This repeats scenario 1 outcome and no reason to enter
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14. No. 3: Quantity Competitors
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No. 3: Quantity Competitors
Switch from prices to quantities (Cournot competition)
Look for an outcome in which E is happy with her quantity, given I’s quantity, and vice versa.
Will E enter?
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15. No. 3: Quantity Competitors
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No. 3: Quantity Competitors
Answer
Specify demand curve: P = a – bQ
End point: Firms will enter until all profits are gone (zero profits condition)
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16. How many firms will enter?
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How many firms will enter?
With cost function and demand curve, solution has form
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17. Bottom Line Duh: Answer depends on precise values But
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Bottom Line
Duh: Answer depends on precise values
But
Depending on competition assumptions, Bertrand v. Cournot, good chance that we will have more than one firm competing
Remember, this is in a case where the lowest cost way to produce every quantity of output is by having a single firm
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18. 11/30/2018
Bottom Line
So, key point, natural monopoly costs will not necessarily give rise to a monopoly at all
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19. 11/30/2018
Evaluating Entry
Are we better off or worse off as a result of this entry?
Pros
Entry buys us competition
Cons
Comes at cost of duplicative investment in fixed-cost infrastructure
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20. November 30, 2018
11th U.S. Census (1890)

21. November 30, 2018
11th U.S. Census (1890)

22. November 30, 2018
11th U.S. Census (1890)

23. Historical Background
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Historical Background
Creation of Express Service
Started in 1839
Provide a superior class of service for items of sufficient value to justify a higher level of care
Express company would contract with a railroad to attach a car or to arrange for space in a car
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24. Historical Background
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Historical Background
Express company would take full responsibility
Service offered on a daily basis
Interconnected Network Created
Key companies—the Adams, the American, the United States and the Southern—divide market between them and arrange connection handoffs.
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25. Adams Express Co. Shippers’ Guide (1890)
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26. Adams Express Co. Shippers’ Guide (1890)
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27. Boston Newspaper, Feb. 23, 1839 (from Stimson, History of the Express Business, 1881, p.34)
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28. Contractual Arrangements with Railroads
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Contractual Arrangements with Railroads
William Harnden and the Boston & New York Transportation Company
Assigned 150 cubic feet on daily basis to Harnden for a payment of $250 per month
Terminable upon the giving of one month’s notice
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29. 1875 Map of the Missouri, Kansas & Texas Railway (the Katy)
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Source:
1875 Map of the Missouri, Kansas & Texas Railway (the Katy)
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30. History of the Adams Express Company
Here
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31. Contractual Arrangements with Railroads
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Contractual Arrangements with Railroads
Adams Express and the Missouri, Kansas & Texas Railway Company
Executed on November 23, 1871
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32. The Adams-Katy Contract
Paragraph 1
“The Missouri, Kansas & Texas Railway Company will furnish for the use of the Adams Express Company one car each way on its line from Sedalia, Missouri, via Parsons, Kansas, to Junction City, Kansas, to be hauled on a passenger train each day that a passenger train is to run over the line.”
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33. The Adams-Katy Contract
Paragraph 1
“The car to be used exclusively by the Adams Express Company, but not to carry at any one time an excess of seven tons of freight. The charges by the express company to its patrons to be not less than one and one-half first-class rates of the Missouri, Kansas & Texas Railway Company at the time, as per its freight tariff.”
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34. The Adams-Katy Contract
Paragraph 1
“The express car, as well as all express matter carried over the road in any baggage or other car, to be in charge of one agent or messenger of the express company on each train, who is to be carried free.”
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35. The Adams-Katy Contract
Paragraph 3
“As part compensation to the railway company for the privileges furnished by it, as herein provided, the express company will pay to the railway company monthly $100 per day for each and every day that trains are run over the railway, or any part thereof.”
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36. The Adams-Katy Contract
Paragraph 4
“As part consideration it is also agreed that the express company shall carry the money and valuable packages belonging to the railway company over the line of the Missouri, Kansas & Texas Railway free of charge,”
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37. The Adams-Katy Contract
Paragraph 4
“and for all matter going to or coming from points beyond the line of the Missouri, Kansas & Texas Railway the express company will charge not exceeding two-thirds of its regular rate for such business; …”
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38. The Adams-Katy Contract
Paragraph 5
“The railway company agree, further, that they will not carry freight or packages for pay in their baggage cars on passenger trains, nor allow their conductors or baggage masters or other employees to do so, during the existence of this agreement,”
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39. The Adams-Katy Contract
Paragraph 5
“nor will they allow any other company, firm, or person the privilege of carrying freight on their passenger trains at any less rate of payment per day, or any greater weight in a car, or upon any better terms in any way, than is granted to said express company under this agreement.”
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40. The Adams-Katy Contract
Paragraph 6
“It is understood that as the line of the Missouri, Kansas & Texas Railway is extended south from the Arkansas river similar accommodations will be furnished for an express business, as herein above provided, at a reasonably increased cost, to be paid by the express company, as shall hereafter be agreed upon.”
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41. The Adams-Katy Contract
Paragraph 7
“This agreement to take effect on the first day of December, A.D. 1871, and continue in force for one year thereafter, and until thirty days’ notice shall have been given to the other by the party desiring to terminate same.”
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42. Conflict with Railroads
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Conflict with Railroads
After nine years, railroads announce intention to terminate the contract and enter the express business.
Express company filed suit and received preliminary injunction continuing access right.
Duty to carry at “just and reasonable rate of compensation”
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43. Sources of Interconnection Obligations
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Sources of Interconnection Obligations
Constitutions
Statutes
Common law status
Contract
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44. SIC: Constitutions Missouri Constitution
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SIC: Constitutions
Missouri Constitution
Declared railroads “public highways” and railroads “common carriers”
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45. SIC: Constitutions Sec. 23 stated that
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SIC: Constitutions
Sec. 23 stated that
No discrimination in charges or facilities in transportation shall be made between transportation companies and individuals, or in favor of either, by abatement, drawback, or otherwise, and no railroad company, or any lessee, manager, or employee thereof, shall make any preference in furnishing cars or motive power.
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46. SIC: Statutes: Kansas Sec. 55
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SIC: Statutes: Kansas
Sec. 55
Every railway corporation in this state which now is, or may hereafter be, engaged in the transportation of persons or property, shall give public notice of the regular time of starting and running its cars, and shall furnish sufficient accommodations for the transportation of all such passengers, baggage, mails, and express freight
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47. 11/30/2018
SIC: Statutes: Kansas
as shall, within a reasonable time previous thereto, be offered for transportation at the place of starting, at the junction of other roads, and at the several stopping places; and they are hereby required to stop all trains carrying passengers at the junction or intersection of other railways a sufficient length of time to allow the transfer of
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48. 11/30/2018
SIC: Statutes: Kansas
passengers, personal baggage, mails, and express freight from the trains or railways so connecting or intersecting, or they may mutually arrange for the transportation of such persons and property over both roads without change of cars;
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49. 11/30/2018
SIC: Statutes: Kansas
and they shall be compelled to receive all passengers and freight from such connecting and intersecting roads whenever the same shall be delivered to them
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50. SIC: Contract and Status
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SIC: Contract and Status
Contract
The starting and ending point here
Common law status (“Common Carrier”)
Non-discrimination duties with passengers and freight
Why not with express companies as well?
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51. Usage Key Court Language
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Usage
Key Court Language
“The right of the express companies to a decree depends upon their showing the existence of a usage, having the force of law in the express business, which requires railroad companies to carry all express companies on their passenger trains as express carriers are usually carried.”
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52. 11/30/2018
Usage
“It is not enough to establish a usage to carry some express company, or to furnish the public in some way with the advantages of an express business over the road. The question is not whether these railroad companies must furnish the general public with reasonable express facilities, but whether they must carry these particular express carriers for the purpose of enabling them to do an express business over the lines.”
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53. 11/30/2018
Usage
“In all these voluminous records there is not a syllable of evidence to show a usage for the carriage of express companies on the passenger trains of railroads unless specially contracted for.”
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54. 11/30/2018
Distinguishing …
“If the general public were complaining because the railroad companies refused to carry express matter themselves on their passenger trains, or to allow it to be carried by others, different questions would be presented. As it is, we have only to decide whether these particular express companies must be carried notwithstanding the termination of their special contract rights.”
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55. U.S. Bureau of the Census, Express Business in the United States (1907)
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56. U.S. Bureau of the Census, Express Business in the United States (1907)
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