Is there such a thing as too much profit?

The Interstate Commerce Act of 1887

by Tara L. Dirst


 

Objectives:

  • Students will discuss the concepts of value-of-service pricing and cost-of service pricing.
  • Students will debate the reasons for and legitimacy of price differences in service.
  • Students will predict the effectiveness of the 1887 Interstate Commerce Act.

Student Preparation:

Students should read the section of the textbook that deals with the Interstate Commerce Act. This is usually in a section dealing with railroads and granger laws.

Example textbooks:

  • Danzer, Gerald A., et al. The Americans. "The Age of Railroads." Evanston, IL: McDougal Littell, 2003. 442-446.
  • Boyer, Paul. The American Nation. "Farmers, Populism, and Depression." Austin: Holt, Rinehart and Winston, 1998. 497-501.

Materials Required:

  • Excerpts from a debate over the Interstate Commerce Act in the House of Representatives (ica-debate.html)
  • Excerpts from the Interstate Commerce Act, printed on a transparency sheet (ica-excerpts.html)
  • Overhead projector (Second Day)

Terms to Know:

  • value-of-service pricing
  • cost-of-service pricing

1st Day

  • Introduction: (10 minutes)
  • Initiate a discussion to introduce the concept of value-of-service pricing vs. cost-of-service pricing.

Ex.: Let's say that I own two Walgreens drug stores. One is in a town that doesn't have any other drugstores, while the other town not only has my Walgreens store, but it also has Wal-Mart, CVS, and Osco pharmacies. I have a drug that the manufacturer sells to me at $10/dose. At the store in the town with multiple pharmacies, I decide that I will sell the drug at $12/dose in order to compete with the other pharmacies. However, at the Walgreens in the town where there are no other pharmacies, I will sell the drug for $20/dose.

Questions:

Is this fair? What if I said that the $12/dose cost doesn't recover the costs of stocking it, ordering it, and having a pharmacist bottle it, and so I am tacking additional charges onto the other store's sale price in order to level out my profit? Is there a limit on how much profit a company can make, in your opinion? What about the person who is living in the community with no other drug stores who is on a fixed income? Do they have a legitimate complaint about the price? What if the manufacturer was really hiking up the price which I paid to maximize his/her profit? What if the research into the production of the drug was provided for through government funds (like a National Institutes of Health grant to a public university hospital who discovered the drug) and not by the drug manufacturer? Should the price of a good be directly tied into the COST OF THE SERVICE? Or should it be determined by its VALUE, i.e., how much the consumer would pay — or be forced to pay?

Let's take this same idea and go back in time with a different industry.

Lecture/Discussion: (25-30 minutes)

Review/discuss the rise of railroads in 19th-century America, drawing out the knowledge students should recall from previous lessons related to technological improvements in agriculture, production rates of farm products, farm product prices, interest rates on loans, and economic conditions.

In the late nineteenth-century, railroads had similar business practices to what we just talked about with the drug store scenario. There were many railroad companies vying for the same business, so when there were multiple railroad companies offering service to a particular area, their prices were extremely low. Often, they were so low that the railroad companies didn't even make enough money to cover the cost of service. Railroad companies in certain areas had to compete with water shipping companies as well — the New Orleans to New York market, for example. In order to compensate for these low prices charged in certain markets, railroad companies charged much more than the cost-of-service rate in areas that didn't have any competition. This caused a substantial difference in the short haul versus long haul rates that railroads charged — with short haul rates either being the same as or often being much higher than long haul. Railroads also had other policies that rewarded certain markets and discriminated against others. Farmers and merchants who lived in the less-competitive areas felt that the railroad companies were engaging in practices that should be illegal. Also, recall that railroads were built with the assistance of huge government subsidies and land grants as well as through bonds that were purchased by people like the local farmers.

Discussion Questions:

  • What was happening to farm product prices at the market from the 1860s through the 1880s?
  • What was happening technologically to farm production during this period?
  • How did these things impact farmers?
  • So, even though the railroad companies were arguing that railroad rates were dropping over this time period, would the farmers still feel taken advantage of by railroad companies? Why?

Explain the advent of state granger laws which in part attempted to remove the differential pricing scheme for short haul versus long haul and the eventual overturning of these laws by the Supreme Court in the Wabash decision of 1886. (118 U.S. 557 Wabash, St. Louis & Pacific Railway Company v. State of Illinois)

Discussion Question:

What would be wrong with Illinois passing a law regulating railroad rates?

Write the commerce clause of the U.S. Constitution (Article I, Section 8) on the board:

"The Congress shall have power … to regulate commerce with foreign nations, and among the several states, and with the Indian tribes;"

If the students don't get the right answer with the previous question, ask them to read the commerce clause and then try to answer the question. Emphasize that the Constitution gives Congress the power to regulate interstate commerce and encourage a discussion as to the rationale of this clause. If the students get the right answer, emphasize that it is the Constitution that gives Congress the power to regulate interstate commerce.

Farmers and merchants had been fighting for a national law that addressed these kinds of issues for a while, but the Wabash decision made it more urgent since it declared state laws unconstitutional.

Assignment:

For the remainder of the class period, let the students read the debate between Representative Crisp and Representative Butterworth on the short haul-long haul clause of the Interstate Commerce Act.  Inform the students that the next day they will be debating the issues in class. Don't tell them which side they will be supporting.

Student instructions to prepare for the debate:

Take notes on the arguments used by both sides, as well as the counter-arguments. For each counter-argument given, see if you can come up with a comeback. Think of additional arguments that weren't brought up in the debate excerpt. If you come up with a new argument, try to think of what a good counter-argument would be.

2nd day:

Debate: (25 minutes)

Break the students into two groups facing each other. You can either split the students evenly down the middle or you can see who supports which argument and if they split is pretty even you can let the students organize according to their opinion.

Start the debate by stating the position of one side and then ask the side that agrees with that to explain why. (Ex.: railroads should be able to set whatever rates they want, regardless of the distance of travel.) After one student speaks, ask the other side for a rebuttal. Don't let one student dominate the discussion. If students are reluctant, ask a question to elicit an answer and select students if you need to.

The following issues must be addressed:

  • Public funding of railroads: Public good vs. private profit
  • Competition brought down prices on railroads — leaving railroads in a financially difficult situation
  • Cost of providing rail service

Discussion and Conclusion — The Effectiveness of the Interstate Commerce Act: (25 minutes)

Put the transparency sheet with selected portions of the Interstate Commerce Act on the overhead projector.  Give the students an opportunity to read it with the following question in mind: How effective do you think this act was in alleviating the problems of the farmers and merchants? Why? (Look at the language like: "unjust," "unreasonable" and "similar.")

Conclude by talking about how the act set up a board which would oversee such concerns, and how violations of these vague rules were difficult to apply, and that very little was done in terms of prosecuting corporations who were in violation of the law. The Interstate Commerce Commission wasn't really effective until much later.

Notes for the Instructor:

The Lecture/Discussion portion is just a suggestion of ideas to cover. The content primarily comes from traditional high school textbooks (see the Example Textbooks part under Student Preparation at the top of this lesson) as well as other references that were consulted (see References Used).

Option for a 1-day lesson plan:

This lesson plan is intended for two 50-minute class periods. If there is not time to have the second day devoted to a debate and conclusion, use the following homework assignment: Students will read the debate from Congress between Representative Crisp and Representative Butterworth on the short haul-long haul clause of the Interstate Commerce Act and write a 2-page essay explaining which side they agree with more and why. Start from the arguments used by the Representatives and expound on them. Make sure you address the counter-argument given in the debate. Think of additional arguments that weren't brought up in the debate excerpt.

The following issues must be addressed in the essay:

  • Public funding of railroads: Public good vs. private profit
  • Competition brought down prices on railroads — leaving railroads in a financially difficult situation
  • Cost of providing rail service

Skip the debate portion of the above lesson and lecture on the effectiveness of the Interstate Commerce Act. Do show the students the overhead transparency with the excerpts from the Interstate Commerce act and highlight the words "unjust," "unreasonable" and "similar" and what that meant for the implementation of the act.

State Standards Addressed:

  • 17.C.5c Describe geographic factors that affect cooperation and conflict among societies.
  • 16.C.4b (US) Analyze the impact of westward expansion on the United States economy.

References Used:

Hoogenboom, Ari and Olive. A History of the ICC: From Panacea to Palliative. New York: W. W. Norton & Company, Inc., 1976.

 

We would like to thank The Dirksen Congressional Center for their generous support in the creation of this lesson plan.