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RAILROAD
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_The Case of Railroads having Common Terminal Points._--In the fourth
case there are, besides the other carriers, two railroads between A
and B which compete for the traffic at these terminal points, but not
at intermediate ones. Their facilities for through traffic are alike.
The local traffic on the different lines is unlike, since it is
affected by the character of the regions through which the railroads
pass; but the charges made for local traffic are governed by the
comparatively simple principles which we first stated. In contending
for freight to way stations we may say that the railroad has to
compete with wagons upon the highway, but with nothing more efficient.
The charges for local freight may therefore be extremely high, while,
if the railroads are really competing as vigorously as pure theory
requires, and if the normal results of competition are completely
realized, the rate which can be maintained between A and B for any
articles carried will be no higher than those which cover the variable
costs entailed on the route which is the less economical of the two.
The line to which this test assigns the traffic between A and B must
then stand the further tests we have described--those involved in
contending for business with carriers using respectively the water
route and the railroad from C to B.

_A Condition leading to a Reduction of Fixed Costs._--It is safe to
assume that one of the two railroads from A to B has more local
traffic than the other. It may be that even with this advantage its
total returns of all kinds may fall short of covering its total
outlays. In that case the total returns of any less favorable route
must fall still further short of the amount necessary for covering all
outlays; and if we adhere to the assumption that neither consolidation
nor anything resembling it takes place, we have a case in which both
railroads must undergo reorganization. The fixed charges of the better
route must be scaled down and the creditors of this railroad must
accept the loss, while on the other route the fixed charges must be
reduced still more and the creditors must suffer a larger loss. It
goes without saying that the prospect of such a calamity means
consolidation. It is evident what alternative competitors face in
cases in which heroic