Willingness to Pay for Water Transportation in the Ohio River Basin

The question of elasticity was raised to a high level in the Upper Mississippi-Illinois Waterway River Navigation study undertaken by the Rock Island District of the U.S. Army Corps of Engineers in 1994. That study, in contrast to earlier works, assumed that every shipment was sensitive to price. National Academy of Sciences reviewers supported the idea of using barge demand functions that were responsive to price but were critical of assuming this distribution rather than measuring it empirically. A study to provide information on shipper willingness to pay for barge transportation was conducted. Interviews of barge transportation providers and users regarding shipper willingness to pay are summarized, and factors affecting demand are discussed. An early attempt to estimate barge price elasticities and the problems inherent in this type of analysis are also discussed. Significant interview findings were that shippers on the Ohio River Basin navigable streams made a decision to locate there and that they would pay much more than the next least costly rate to maintain barge transportation. The findings also indicated that if commodities had a high value, were not dangerous to the public, and moved in fairly small quantities, shippers would shift from barge to rail for a small rate savings. Traditional short-run demand relationships were difficult to estimate with cross-sectional data maintained by the Tennessee Valley Authority. It appears that in many settings output decisions and decisions regarding distribution channels are made in advance of transportation considerations, so that output quantities and shipment destinations are parametric in a transportation cost minimization process.