Railroad Economies of Scale, Scope, and Density Revisited

Abstract

The movement of freight on railroads is subject to a number of technological characteristics that make costing of specific traffic a complex process. Among these restrictions are conditions of joint production, economies of scale, scope, and density, and a lack of data on specific expenditures related to individual freight movements.

In this paper, an econometric cost model using publicly available data and methodology is developed for the examination of average and marginal costs in the industry. The model is decomposed into individual elasticity estimates for operating parameters to examine economies of scope. Finally, the size of the firm is varied through multiplying the capital stock measurements and estimating the cost behavior as firm capital stock is varied between one-quarter and two times the level of 2005.

Results indicate that the railroad industry has effectively exhausted the possible economies of scale but can still gain from economies of density and scope. In addition, there appears to be little economic justification for mergers creating transcontinental railroad systems.