A shadow price approach examining service quality in a heavily captive U.S. freight transportation market: The case of grain transport

Abstrac The aim of this study is to examine modal usage for shippers with limited transportation options to assess rail and truck quality of service. While service quality is an important consideration in shippers' mode choice decisions, freight studies often assume that shippers minimize total transportation costs subject to shipping rates. We test the cost minimization hypothesis using data on wheat shipments for individual grain elevators in the U.S. Great Plains where shippers are limited to rail and truck services with no direct access to navigable waterways and find that shippers' use a higher share of rail than they would if shipping rates alone determined their use of rail. This observation, in tandem with recent shipper surveys showing higher than expected ratings of service quality, suggests that shippers’ modal choice of rail likely stems from a perception of higher quality of service provision. Moreover, this suggests that railroads have provided high service quality despite perpetual captivity concerns. Our results support the idea that even in markets with limited intermodal competition, other types of competition, including geographic, product, and intramodal competition are sufficient to compel railroads to provide a level of service that meets or exceeds expectations.