Network effects and the measurement of returns to scale and density for U.S. railroads

Abstract

From the earliest days of railroad service, the nature and extent of scale economies in rail operations have provided grounds for ongoing study and debate. Recent attempts to define and quantify scale economies have recognized that it is important to distinguish returns to traffic density from returns to scale (or firm size). Returns to density reflect the relationship between inputs and outputs with the rail network held fixed. Returns to scale reflect the relationship between inputs and the overall scale of operations, including both outputs and network size. The dominant view is that the rail industry is characterized by increasing returns to density but constant returns to scale. Certainly there are plausible theoretical grounds for this view, and the empirical evidence has been convincing to some observers. For example, in a recent review Keeler (1983) stated: “Studies of railroad costs from the 1970's tell a … consistent story about returns to traffic density. They all give strong evidence of increasing returns, up to a rather high traffic density …” (p. 51 [emphasis added]). He commented that “there are constant or mildly decreasing returns to larger firm sizes, when route density is held constant” (p. 164). Keeler bases his conclusions primarily on five studies: Caves, Christensen, and Swanson (1981), Friedlaender and Spady (1981), Harmatuck (1979), Harris (1977), and Keeler (1974).

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