Distinguishing multiproduct economies of scale from economies of density on a fixed-size transport network

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.