The Market That Antitrust Forgot: The Unusual Persistence of Collective Railroad Ratemaking, 1870-2008

An accepted truism of comparative political economy is that relative to other developed countries in Europe and East Asia, the United States has historically eschewed a cooperative style to managing capitalism preferring instead a “liberal market” approach that downplays the role of organized business and labor interests in economic governance and instead emphasizes competitive market arrangements.

Economic sociologists frequently invoke stylized histories of the rail industry to describe and explain the eventual triumph of the American liberal market approach, citing in particular the late-19th century failure of private rail cartels to stop ruinous price wars and the eventual rise of nationally integrated rail systems by the early 20th century.  The failure of rail cartels followed not from their purported inefficiency to solve collective action problems, but rather from their failure to secure the backing of the state for their private agreements.  Instead of the state enforcement of rail cartels, the passage of Federal antitrust laws in 1890 outlawed cartelized rail arrangements and all but “extinguished a form of industrial cooperation” within the rail industry.  In its place, antitrust laws initiated a new business model premised upon financially-leveraged buyouts and mergers between competing rail lines.  Thus, institutional scholars conclude, the highly concentrated economic landscape of the early 20th century rail was—in the memorable language of sociologists Frank Dobbin and Tim Dowd--a “market that antitrust built.”  

Drawing upon archival materials, court proceedings, and regulatory rulemakings, this paper documents that the passage of antitrust law did indeed end prevailing cartel practices which divided rail markets by revenue and traffic, but did not ultimately discontinue rail rate associations from reforming under new names and price fixing by other means.  Railroad rate associations, bureaus, and conferences still grew to exert control over industry outcomes well into the 20th century, not through dividing markets, but rather more subtly in directly devising the machinery of rail ratemaking—tariff schedules and freight classifications—with the full approval of government regulators, who counterbalanced associational control with public utility-style rate regulation.  Over the subsequent decades, this mixed cartel/regulation strategy was applied vigorously to other transportation carriers including trucking and domestic water shipping with again the full support of transportation regulators.  Contrary to the standard narrative, rail cartels and related common carrier rate bureaus not only survived after their purported death but moreover worked precisely when they acquired the backing of the state.  As these arrangements came under greater antitrust scrutiny around World War II, common carrier rate bureaus were granted full antitrust immunity to continue their price fixing efforts in the so-called public interest.  The diminution of rate bureaus came only with transportation deregulation in the late 1970s, which explicitly singled out the anticompetitive effects of rail cartels.  Full antitrust immunity ended only in 2008.  Pace the standard narrative, the 20th century market for rail services was not a market that antitrust built, but rather a market that antitrust forgot.