Abstract
In order to produce a certain vector of flows over a fixed-size network, a transport firm has to choose, among many other things, a route structure. In accommodating increasing traffic, transport firms will adjust their route structure to minimize costs. However, transport industry structure analysis considers only, often implicitly, the case where the route structure is fixed. In this paper, economies of density, that represents the latter, are conceptually distinguished from economies of scale on fixed-size networks, S, where we allow the route structure to vary. Intuition with a simple example, evidence from the airline industry and the derivation of a formula to calculate S from an estimated cost function are provided. Results are both novel and encouraging. Transport firms, while closer to exhaust economies of density, would still have available sizeable economies of scale.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Baltagi BH, Griffin JM, Rich DP (1995) Airline deregulation: the cost pieces of the puzzle. Int Econ Rev 36(1):245–258
Basso LJ, Jara-Díaz SR (2005) Calculation of economies of spatial scope from transport cost functions with aggregate output (with an application to the airline industry). J Transp Econ Policy 39:25–52
Basso LJ, Jara-Díaz SR (2006) Is returns to scale with variable network size adequate for transport industry structure analysis? Transp Sience (in press)
Braeutigam RR (1999) Learning about transport costs. In: Gomez-Ibañez J, Tye WB y Winston C (eds) Essays in transportation economics and policy. Brooking, Washington, District of Columbia, pp 57–97
Brueckner JK, Spiller PT (1994) Economies of traffic density in the deregulated airline industry. J Law Econ 37:379–413
Caves DW, Christensen LR, Tretheway MW (1984) Economies of density versus economies of scale: why trunk and local airline costs differ. Rand J Econ 15:471–489
Caves DW, Christensen LR, Tretheway MW, Windle RJ (1985) Network effects and the measurement of returns to scale and density for U.S. railroads. In: Daughety AF (ed) Analytical studies in transport economics. Cambridge University Press, New York
Filippini M, Prioni P (2003) The influence of ownership on the cost of bus service provision in Switzerland—an empirical illustration. Appl Econ 35:683–690
Gillen D, Oum TH, Tretheway M (1990) Airlines cost structure and policy implications. J Transp Econ Policy 24:9–34
Hendricks K, Piccione M, Tan G (1995) The economics of hubs: the case of monopoly. Rev Econ Stud 62:83–99
Ivaldi M, McCullough G (2001) Density and integration effects in class I US Freight railroads. J Regul Econ 19(2):161–182
Jara-Díaz SR (1982) The estimation of transport cost functions: a methodological review. Transp Rev 2:257–278
Jara-Díaz SR, Basso LJ (2003) Transport cost functions, network expansion and economies of scope. Transp Res E 39:271–288
Jara-Diaz SR, Cortés C (1996) On the calculation of scale economies from transport cost functions. J Transp Econ Policy 30:157–170
Karlaftis M, McCarthy P (2002) Cost structures of public transit systems: a panel data analysis. Transp Res E 38:1–18
Keeler JP, Formby JP (1994) Cost economies and consolidation in the U.S. airline industry. International Journal of Transport Economics 21(1):21–45
Kumbhakar SC (1990) A reexamination of returns to scale, density and technical progress in US airlines. South Econ J 57:428–442
Kumbhakar SC (1992) Allocative distortions, technical progress and input demand in U.S. airlines: 1970:1984. Int Econ Rev 33(3):723–737
Liu Z, Lynk EL (1999) Evidence on market structure of the deregulated US airline industry. Appl Econ 31:1083–1092
Mizutani F (2004) Privetly owned railways' cost function, organization size and ownership. J Regul Econ 25(3):297–322
Oum TH, Zhang Y (1997) A note on scale economies in transport. J Transp Econ Policy 31:309–315
Oum TH, Zhang A, Zhang Y (1995) Airline network rivalry. Can J Econ 28:836–857
Panzar J (1989) Technological determinants of firm and industry structure. In: Schmalensee, R, Willig R (eds) Handbook of industrial organization. North-Holland, pp 3–59
Panzar J, Willig R (1977) Economies of scale in multioutput production. Q J Econ 91:481–493
Swan WM (2002) Airline route developments: a review of history. J Air Trans Manag 8:349–353
Tretheway MW, Oum TH (1992) Airline economics: foundations for strategy and policy. Center for Transportation Studies, University of British Columbia
Wei W, Hansen M (2003) Cost economics of aircraft size. J Transp Econ Policy 37:279–296
Winston C (1985) Conceptual developments in the economics of transportation: an interpretive survey. J Econ Lit 23:57–94
Xu K, Windle C, Grimm C, Corsi T (1994) Re-evaluating returns to scale in transport. J Transp Econ Policy 28:275–286
Ying JS (1992) On calculating cost elasticities. Logist Transp Rev 28:231–235
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Basso, L.J., Jara-Díaz, S.R. Distinguishing Multiproduct Economies of Scale from Economies of Density on a Fixed-Size Transport Network. Netw Spat Econ 6, 149–162 (2006). https://doi.org/10.1007/s11067-006-7698-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11067-006-7698-z