The price behavior of trade-marked and standardized products 2 is here examined with a view to discovering the relationship, if any, between product differentiation and the flexibility and sensitivity of prices. For this purpose, the relationship between frequency of price change and amplitude of price movement is here considered for the standard and trade-marked goods which are included in the Bureau of Labor Statistics wholesale price series.

In general, trade-marked or highly differentiated products tend to have highly rigid price structures. When the trade-marked products included in the Bureau of Labor Statistics series are grouped on the basis of frequency of price change according to the classification given in appendix 2, table II, one-half of all the price series for trade-marked products are to be found in groups I and II. Not a single trade-marked or highly differentiated commodity is to be found in the three most flexible price groups-groups VIII to X, inclusive.

3

In order to see whether the relationship between rigidity and amplitude of price movements is the same for trade-marked and for standard products, prices whose flexibility is similar are compared on the basis of sensitivity. For this purpose the average price 3 of trade-marked, semidifferentiated and standard products falling within each of the frequency groups in appendix 2, table II, which included any trade-marked products, were computed, group by group, for each year during the period 1926 to 1936.

This computation reveals a very striking difference in behavior between the prices of standard and of trademarked products of approximately the same degree of flexibility. The chart illustrates this difference. In each case the price of trade-marked products shows a significantly greater amplitude of movement than does the price of the standard products of the same frequency of price change. The trade-marked products consistently show a more rapid decline during the depression and a sharper rise subsequently than did the standard products in the same price group. Table I expresses this comparison in terms of percentage decline between 1929 and 1932 and percentage rise from 1932 to 1936. In every group but one, trade-marked products show a significantly sharper price decline during the depression,

1 Appendix 3 was prepared by Saul Nelson.

2 With few exceptions, standardized commodities are those classified as standard and trade-marked commodities are those classified as unique or differentiated, in appendix 2, table I, column 15.

3 Geometric averages were used.

standard products in every group but one. The average for the seven groups showed a rise of 16.1 percent for trade-marked articles as against only 8.5 percent for standard products.

Perhaps the most striking feature of this relationship is the consistency with which it expresses itself. This consistency manifestly precludes any possibility that purely chance factors are operating to cause this difference in behavior.

It is important to emphasize that, even for trademarked products, a marked correlation exists between frequency of change and amplitude of movement. Table I shows that the decline in price experienced by trade-marked products during the depression increased sharply and regularly with frequency of change. In each case, however, the extent of the decline was of approximately the same order as that suffered by standard commodities whose apparent flexibility, judged only by frequency of price change, was considerably greater. Trade-marking thus appears to carry with it

the power to postpone but not to avoid the making of price adjustments to meet changing competitive conditions. The rigidity displayed by the prices of trademarked articles and that of the prices for standard commodities thus seems to be, to a degree, different in kind.

If the price of a standard product changes but rarely, it is probable that the total amplitude of its fluctuations is also narrow. If, on the other hand, comparatively few price changes are recorded for trade-marked commodities, it is still entirely possible that it will respond fully, though with some delay, to changing general economic conditions. This behavior suggests that the ability of producers of standard products to control the frequency of price change is associated with the ability to restrict actual price fluctuations within narrow limits. Trade-marking, on the other hand, appears to permit stability of price quotations in the absence of the ability to limit the amplitude of price fluctuations.

The statistical information available in the public utility field leaves much to be desired. While it has been possible to collect selling price series for most of the major public utilities, these series for the most part relate only to the country as a whole or to a sample thereof, and thus possess the frailties that characterize any over-all average. In some cases it has been impossible to obtain even a single price series for the entire period of years. In other cases, notably the telephone industry, it has been possible to secure an index for only a single state or area; and for one important industry, motor transport, no worthwhile data are available. Satisfactory series for water transportation are also lacking. Moreover, it has been impossible to obtain adequate data for certain divisions of the utility markets; thus the electric, gas and telephone data relate only to the residential sales of those services. In the case of certain of the measures employed, the accuracy of the data themselves is only approximate as a measure of average price behavior. This is especially true of railroad freight rates.

There is a further inherent deficiency in virtually all of the price statistics presented. The unit of service chosen for such industries as freight transportation or residential telephone service, is not a constant during a period of time. Quality factors, such as speed, convenience, safety and regularity of service are inevitably modified, so that precisely the same thing is not being purchased over a period of years. While it has been impossible to make allowance for changes of this sort in the price series which are presented, it should be recognized that an influence is operative which in many cases amounts to a reduction in price in that a better quality of service is obtained. Changes in quality, however, are usually gradual and of significance only over a period of years rather than during a short-run cyclical period of price fluctuation. Moreover, the same criticism may be advanced toward a large number of price data included in such measurements as the wholesale price and cost of living series of the Bureau of Labor Statistics, with the result that when different price series are compared there is a tendency for errors to be mutually compensatory.

Table I gives in summary the results for each series for 1929, 1932, and 1936.

Table II gives an index of freight rates for 1900 to 1936. To our knowledge there has never been published an accurate index of the freight rate level. It has been customary to employ the revenue per freight

1 Appendix 4 was prepared by John D. Sumner, assisted by R. G. Lorenz.

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2

ton-mile as a crude approximation of movements in the level of freight rates, but this index is subject to error in several respects. The changes in average revenue per ton-mile may result not only from adjustments in freight rates, but also from changes in the average distance for which commodities are transported, and shifts in the composition of traffic between high and low revenue commodities. Either an increase in the averge length of haul, or a greater proportion of low revenue traffic will tend to reduce the average revenue per ton-mile. A fourth and probably less important variable in the situation is the changing distribution of originated traffic between different sections of the country. Inasmuch as the rate level is not uniform through the United States, an increase in the relative proportion of low rate eastern territory traffic, for example, would operate to lower the revenue per ton-mile.

An adjustment has therefore been prepared which involves a partial correction for two of these factors, the change in length of haul and the shifting commodity composition of traffic. Adjustment for changes in length of haul was made as follows: (1) The average distance of haul for all tonnage carried by the railroad network (i. e., by the railroads treated as one system) was tabulated for the period 1900-1936; (2) A composite progression rate schedule, showing the general effect of distance on the amount charged, was obtained from the Interstate Commerce Commission.3 This progression rate schedule is not precisely accurate for any rate area, commodity group, or year, but is thought to be roughly representative of the effect of distance upon the level of charges.*

From the composite rate schedule a hypothetical total revenue for each length of haul was then computed. Inasmuch as freight rates progress in blocks or steps each comprising a number of miles, it was necessary to interpolate to find a charge for the average haul for each distance in (1) above. It was assumed that for each rate-distance block the rate was centered at the midpoint of the block. (3) This hypothetical revenue, divided by the average length of haul in each year, provided a revenue per ton-mile for each year. (4) This annual revenue per ton-mile was then indexed,

2 The freight rate is typically based upon a tapering principle, by which the total charge increases much more slowly than does the distance of carriage.

3 The Interstate Commerce Commission should not be held responsible for the methods employed in the computation of this index, although members of the staff were generous with advice and suggestions.

The representativeness of the schedule is probably less for pre-war than for postwar years.

using 1926 as a base. The index thus obtained constituted a correction factor showing roughly the extent to which, assuming no changes in the level of freight rates as such, or in the composition of traffic, actual revenue per ton mile would have changed, due solely to changes in the average length of haul.

Adjustments for changes in the commodity composition of traffic hauled were computed in the following manner: The tonnage originating on Class I railroads was tabulated, broken down according to the six-fold classification of the Interstate Commerce Commission. This classification includes carload shipments of agricultural, animal, mineral, forest and manufacturing and miscellaneous products and less-than-carload freight. The percentage of each commodity group to the total, was then computed and a ton-mile revenue, constant for all years, was assumed for each of the commodity groups. These revenue data, suggested by the Bureau of Statistics of the Interstate Commerce Commission, are believed to be fairly representative of differences between the commodity groups. The assumed tonmile revenues were as follows: Products of agriculture, 1.142 cents; products of animals, 1.958 cents; products of mines, .802 cent; products of forests, .853 cent; manufacturing and miscellaneous, 1.369 cents; and lessthan-carload, 4.155 cents. Using the percentage composition of traffic for each year for weighting purposes, a theoretical average revenue per ton-mile was computed to take account of changes in the relative importance of each major commodity group. This revenue per ton-mile was then indexed, using 1926 as a base. This index provides a correction factor showing the extent to which, assuming no change in the level of freight rates or length of haul, average revenue per ton-mile might be expected to vary, due to changes in the composition of traffic.

The two adjusted indexes were then multiplied together to obtain a combined correction factor. The actual revenue per ton-mile, tabulated from the annual Statistics of Railways in the United States, was then divided by the correction factor for each year and the result indexed on a 1926 basis.

Several objections can be brought against each of these two adjustments.

Against the adjustment for length of haul, the following objections may be made:

(a) When there is a shift in the relative importance of the major commodity groups, there is usually an accompanying change in the average length of haul. If one makes adjustment for these shifts in commodity composition of traffic, this adjustment must be made on the basis of the average revenue per ton-mile, which in turn partially reflects the average haul of that commodity. A partial duplication results from making another adjustment for changes in the average length

of haul. The net result of this error may tend either unduly to increase or decrease the index.

(b) The average length of haul during the period was increased in part as a result of changes in the method of reporting traffic. Greater use of through billing and increases in the dimensions of individual railroads have contributed to an apparent increase in haul which did not actually take place. That is, a shipment going from point A to point B may previously have been counted as two originated shipments on account of transfer from one railroad to another, but later is counted as one shipment. Informed sources consider this fictitious increase to be of minor importance.

(c) The rate schedule is not a straight-line progression, but rises more sharply on the short hauls, and арproaches the horizontal on the long hauls. The average haul is around 300 miles. At this point, the rise in revenue per marginal ton-mile is less sharp than at shorter hauls. In recent years the lengthened haul is due largely to loss of short-haul traffic to the trucks. Obviously, this means a greater shrinkage in average revenue per ton-mile than can be compensated for by corrections for the lengthened haul at the 300-mile point. This influence is somewhat counterbalanced by a rising length of haul due to the increase of very long hauls, where the rise in marginal revenue per tonmile is even smaller than at 300 miles.

(d) The assumed progression scale of freight charges, while believed to be substantially representative of the true progression, is not for any year, nor for all rate areas, identical with it.

The adjustment for the changing commodity composition of traffic is subject to the following major defects:

(a) The adjustment made is incomplete in that it was impossible to correct for shifts in the relative importance of high and low revenue freight within each of the six major commodity groups. A relative increase in the tonnage of manufactured and miscellaneous products, for example, tends to increase actual revenue per ton-mile for all freight traffic because this group of commodities moves at a higher than average revenue per ton-mile. This apparent rise in freight rates is eliminated by the correction factor described above, but only to the extent that the relative increase of traffic in manufactured products did not occur in products within that group which were carried at a higher (or lower) revenue per ton-mile than the assumed average of the manufactured products as a whole. Thus, if the increase in major group tonnage is solely due to an increase of high revenue commodities within the group, the correction is incomplete because it does not sufficiently deflate the actual revenue per ton-mile of all freight traffic. The rise in the latter resulted partly from an increase in the relative importance of a