ECONOMICS AND STRUCTURE
The Railroad Problem is an economic problem.
It is only by the application of economic principles that a final solution will be found. Any attempt to resolve railroad difficulties is doomed to failure if it ignores economic fundamentals, regardless of the intentions of its proponents and the amount of public or private funds spent in its behalf.
The concepts of competition and monopoly have special significance in the railroad industry, since economic regulation depends to a large extent on their interpretation. Despite nearly a century of regulatory efforts by the Interstate Commerce Commission, debate continues about whether the railroad industry is predominantly competitive or monopolistic, and how regulatory policy should be addressed.
To understand the railroad industry's problems, the problems must be analyzed in terms of economic fundamentals. The concepts of competition, monopoly, fixed and variable costs, economies of scale, and natural monopoly are essential to this analysis.
Competition is fundamental to the free market system and is generally regarded as beneficial. The classic competitive market is characterized by numerous independent firms selling a highly standardized product. Each seller (producer) is so small that it has no influence over the market. Price is determined by the market's supply and demand, not by individual buyers or sellers. Firms enter and leave the market freely. The most efficient firms earn the highest profits. Less efficient firms have lower profits, operate at a loss, or shut down and leave the market. Agriculture, with many farmers selling the same products on open markets, is often cited as an example of a classic competitive market.