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- Title
Price Distortions and Second Best Investment Rules in the Transportation Industries.
- Authors
Friedlaender, Ann F.
- Abstract
There has recently been considerable interest in the question of second best pricing rules in the surface freight industries. This article extends this second best analysis in the transportation industries to the problem of investment and shows that in the presence of price distortions, first best investment rules should generally not be used. While the specific second best investment rules that should be followed typically are complicated expressions that depend upon the underlying cost and demand functions. This article thus explores the relationship of investment rules to price distortions from both a theoretical and an empirical perspective. The theoretical analysis presents the argument in the simplest case of a single mode producing a single output and thus provides a relatively intuitive discussion of the problem. The empirical discussion then presents a simulation analysis of second best investment levels in the railroad industry in the context of intermodal competition and multiple outputs.
- Subjects
PRICE regulation; TRANSPORTATION industry; INDUSTRIAL laws &; legislation; INVESTMENTS; ECONOMIC demand; COST; COMPETITION
- Publication
American Economic Review, 1981, Vol 71, Issue 2, p389
- ISSN
0002-8282
- Publication type
Article