Regulatory Capture in the Railroad Industry

The Interstate Commerce Commission (ICC) was created in 1887 to regulate the rates and practices of railroads. After decades of monopolistic practices, the ICC was supposed to protect consumers.

Regulatory capture is when the regulatory agency, which is supposed to act in the public interest, becomes dominated by the industry or sector it is charged with regulating.

However, the ICC ended up protecting many of the interests in the railroad industry (and later, the trucking industry).

Favorable rate setting. The ICC was supposed to set fair and reasonable rates for shipping goods (Hepburn Act). However, the rates ended up disproportionately favoring railroad companies over smaller shippers. The ICC made exceptions for some of the biggest companies with loopholes (like the exemption for “private car lines”).

Barrier to entry for competitors. The licensing and approval processes made it difficult for new entrants. The government would decide what routes could be served by which companies.   

Industry influence. The ICC appointed railroad industry veterans. Likewise, the revolving door continued as retired ICC commissioners found jobs at the companies they once regulated. When companies failed to follow the rate or safety guidelines, the ICC was slow to prosecute.

Complex rule-making. Established companies could more easily navigate the complex rules and regulations set forth by the ICC, effectively sidelining smaller or newer companies.