Page 528 - Microeconomics, Fourth Edition

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502 CHAPTER 12 CAPTURING SURPLUS
time railroads have charged different prices for transporting different kinds of goods.
Coal and grain, however, are both bulk commodities; they are loaded into cars with
no special handling or packaging. Also, a car loaded with grain weighs about the same
as a car loaded with coal (typically, around 100 tons), so the marginal cost of moving
a ton of either commodity over a given distance is about the same. 12 Yet railroads
charge two or three times as much to move coal as they do to move grain. Why is this
the case?
The answer lies in the differences in the demands for moving coal and grain.
Railroads face more competition from barges and trucks when they carry grain. For
example, grain shipped from Iowa to port facilities in New Orleans can be moved by
barges along the Mississippi River or along highways by trucks. Therefore, the de-
mand for rail transport services by shippers of grain is sensitive to the price a railroad
charges. Figure 12.9(b) illustrates this price sensitivity in the demand curve D faced
g
by a railroad firm for transporting grain. If the railroad charges too high a price, many
grain shippers will not use rail service.
Coal, in contrast, is often shipped over much longer distances (e.g., from coal-
producing regions in Wyoming to electric power companies in Arkansas and
Louisiana), and railroads have a cost advantage over trucks for such long shipments.
Furthermore, there are few options for moving the coal by water because most coal
mines are not located near canals or navigable rivers, so there is little competition

$38
P c , price of shipping coal (dollars per ton) P = 24 P c , price of shipping grain P = 12 MC
(dollars per ton)

c

$14
g
10

c
g
shipments by rail
shipments by rail
MR
c D , demand for coal MR g D , demand for grain
0 14 19 38 8 28 56
Q , quantity of coal Q , quantity of grain
c g
(tons per year) (tons per year)
(a) (b)
FIGURE 12.9 Pricing Coal and Grain Transport by Rail: Third-Degree Price Discrimination
The demand for rail transport of coal is much less price sensitive than the demand for rail
transport of grain. Railroads can exploit this fact, using third-degree price discrimination to
set a much higher profit-maximizing price for coal than for grain, even though the marginal
costs of transporting the two goods are the same.

12 One can measure the output of a freight transportation company in more than one way. One measure
commonly used in the United States is the ton-mile, which refers to the movement of one ton of the
commodity over one mile. In other parts of the world, output is often measured by ton-kilometers.