Impact on western grain rail rates from an elimination of the legislated rate cap

The Canadian government is currently reviewing grain transportation legislation to determine whether an elimination of the rail rate cap for western grain is a desirable option. In this paper, a spatial optimization model is constructed and calibrated for the province of Saskatchewan. The purpose is to compare current rates with simulated rates in an unregulated environment where Canada's two railways freely compete. In the Nash equilibrium of the unregulated pricing game, average rail rates range from 4% higher to 25% higher than the current average rate, depending on the assumed value for the trucking cost parameter. Reductions in railway variable operating cost because of productivity gains associated with further deregulation will dampen and possible reverse these predicted rate increases. However, any form of collusive behavior between the two railways would serve to increase the overall rate markup.