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A systems analysis of scheduled air transportation networks
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BibliographicSection
particular, we specify that the technology of the industries can be represented by a cost function of the form C($, w; 0, where C represents costs, IJ is a vector of quality-adjusted outputs, w a vector of prices for the variable factors, and t a vector of technological conditions wh’ich inchrdes quantities of fixed factors if appropriate. Costs are defined as the summation of the firm’s expenditures on variable factors, and the outputs are qualityadjusted using 9’ = y’ *4(d), where y‘ is the quantity of generic output, and qi a vector of qualities that correspond to the ith output. This specification of quality adjustment is equivalent to the simple repackaging model considered by Fisher and Shell[1972]. For both studies, we-specify a translog functional form for C(& w; t). The second chapter presents estimates of C($, w; t) for motor carriers of general commodities. For these lirms, we find constant returns to scale. We also find evidence of systematic price distortion in the rate schedules which are the outcome of the regulatory process. The policy implication of these findings is that the trucking industry should be deregulated. In the thud chapter we estimate a short-run cost function for U.S. railroads. Among the results with important implications for national policy are a surprisingly high estimate of the marginal cost of low-density service and an estimate of long-run increasing returns to scale. Alternative policy responses to these results are considered; a policy of subsidized marginal cost pricing is examined in detail, In both studies we find that the components of the technological conditions vector have an important effect on costs, factor shares, and estimates of returns to scale. Thus it appears that the inclusion of these variables in models of technology is a significant methodological innovation.
A Systems Analysis of Scheduled Air Transportation Networks, William M. Swan (dissertation in the Department of Aeronautics and Astronautics, Massachusetts Institute of Technology, Cambridge, MA 02139). This work establishes the conditions for airline system design building from submodels of smaller aspects of air transportation. The first three sectiops develop sub models which then are combined in extensive numerical studies of single market services. The final section discusses the changes to this problem that occur due to network effects. The hrst section develops a simple model of the cost of providing scheduledtransportation on a link. The cost of aircraft of various capacities are divided into a perfrequency cost and a per-capacity cost for conventional subsonic turbojet designs. This cost structure implies that the more capacity provided in conjunction with a tied schedule of departures, the lower the average cost per seat. It is suggested that such aircraft scale economies create a trend toward monopoly or at least oligopoly services. The second section develops a model for demand. The market for transportation is argued to be the city pair.
Demand for scheduled service. is expressed in terms of fare, average displacement time for the schedule, and the probability of -capacity being available. The latter two measures depend on frequency and load factor. Fare, frequency, and load factor are combined into a single total perceived price for the service. This price depends on the consumer’s personal value of time. With only a few competitors in such a market, only a few of the technically possible qualities of service will be offered. The services available will be suited better to some tastes than to others. Distributional effects influence the politics of transport regulation and have been neglected in the past. In this light it is shown that competitive firms are likely to design their services for the same value of time. Product matching increases costs without improving the distribution of benefits. Chapter 4 develops in detail the statistical model used to estimate denied boarding rates from. long run design load factors. The development raises doubts about the viability of competition in this dimension. Chapter 5 develops the optimal service for a single carrier on a single city pair market. Optima defined by maximum traffic at zero loss show the importance of the flexibility in aircraft capacity for long run system design. Both algebraic solutions and extensive numerical studies suggest that optimal designs depend on tralIic and distance. Changes in frequency and capacity are large; load factor and fare more stable. Optima are shallow for U.S. domestic cost structures. The final section brings to the discussion issues associated with networks of services. It is shown that most U.S. domestic city pairs have amounts of tralIlc of only modest size compared to the efficient aircraft capacities. Networks overcome these limitations by sharing vehicles among markets. This is done at the expense of extra departure costs. The network design tradeoff in its simplest form is shown to be between larger aircraft capacities and longer stage lengths. The corresponding routing patterns emphasize stops and connections or direct llights. It is shown by illustration that the average cost for a network cannot be estimated without knowledge of distributions of flow densities and link frequencies. Illustrations also show the importance of network effects even in the largest airline markets. Network design adds another degree of flexibility to the design of transport services: the number of intermediate stops per passenger trip. This affects both cost and service quality. In conclusion it is argued that thin airline markets are too small to need regulation of service or entry because some exploitation must occur to recover costs. Dense markets can support single market competition, although it may be wasteful of resources. Medium markets may support only one carrier. However, medium and even thin markets can be competitively served as part of large airline networks. The growth of air service, then, should tend to be from single-quality single-darrier service to competitive, multistop, network services to nonstop network service, and finally to a broad selection of service/fare options. There is some doubt whether regulation is either necessary or useful in achieving these ends.
BibliographicSection
particular, we specify that the technology of the industries can be represented by a cost function of the form C($, w; 0, where C represents costs, IJ is a vector of quality-adjusted outputs, w a vector of prices for the variable factors, and t a vector of technological conditions wh’ich inchrdes quantities of fixed factors if appropriate. Costs are defined as the summation of the firm’s expenditures on variable factors, and the outputs are qualityadjusted using 9’ = y’ *4(d), where y‘ is the quantity of generic output, and qi a vector of qualities that correspond to the ith output. This specification of quality adjustment is equivalent to the simple repackaging model considered by Fisher and Shell[1972]. For both studies, we-specify a translog functional form for C(& w; t). The second chapter presents estimates of C($, w; t) for motor carriers of general commodities. For these lirms, we find constant returns to scale. We also find evidence of systematic price distortion in the rate schedules which are the outcome of the regulatory process. The policy implication of these findings is that the trucking industry should be deregulated. In the thud chapter we estimate a short-run cost function for U.S. railroads. Among the results with important implications for national policy are a surprisingly high estimate of the marginal cost of low-density service and an estimate of long-run increasing returns to scale. Alternative policy responses to these results are considered; a policy of subsidized marginal cost pricing is examined in detail, In both studies we find that the components of the technological conditions vector have an important effect on costs, factor shares, and estimates of returns to scale. Thus it appears that the inclusion of these variables in models of technology is a significant methodological innovation.
A Systems Analysis of Scheduled Air Transportation Networks, William M. Swan (dissertation in the Department of Aeronautics and Astronautics, Massachusetts Institute of Technology, Cambridge, MA 02139). This work establishes the conditions for airline system design building from submodels of smaller aspects of air transportation. The first three sectiops develop sub models which then are combined in extensive numerical studies of single market services. The final section discusses the changes to this problem that occur due to network effects. The hrst section develops a simple model of the cost of providing scheduledtransportation on a link. The cost of aircraft of various capacities are divided into a perfrequency cost and a per-capacity cost for conventional subsonic turbojet designs. This cost structure implies that the more capacity provided in conjunction with a tied schedule of departures, the lower the average cost per seat. It is suggested that such aircraft scale economies create a trend toward monopoly or at least oligopoly services. The second section develops a model for demand. The market for transportation is argued to be the city pair.
Demand for scheduled service. is expressed in terms of fare, average displacement time for the schedule, and the probability of -capacity being available. The latter two measures depend on frequency and load factor. Fare, frequency, and load factor are combined into a single total perceived price for the service. This price depends on the consumer’s personal value of time. With only a few competitors in such a market, only a few of the technically possible qualities of service will be offered. The services available will be suited better to some tastes than to others. Distributional effects influence the politics of transport regulation and have been neglected in the past. In this light it is shown that competitive firms are likely to design their services for the same value of time. Product matching increases costs without improving the distribution of benefits. Chapter 4 develops in detail the statistical model used to estimate denied boarding rates from. long run design load factors. The development raises doubts about the viability of competition in this dimension. Chapter 5 develops the optimal service for a single carrier on a single city pair market. Optima defined by maximum traffic at zero loss show the importance of the flexibility in aircraft capacity for long run system design. Both algebraic solutions and extensive numerical studies suggest that optimal designs depend on tralIic and distance. Changes in frequency and capacity are large; load factor and fare more stable. Optima are shallow for U.S. domestic cost structures. The final section brings to the discussion issues associated with networks of services. It is shown that most U.S. domestic city pairs have amounts of tralIlc of only modest size compared to the efficient aircraft capacities. Networks overcome these limitations by sharing vehicles among markets. This is done at the expense of extra departure costs. The network design tradeoff in its simplest form is shown to be between larger aircraft capacities and longer stage lengths. The corresponding routing patterns emphasize stops and connections or direct llights. It is shown by illustration that the average cost for a network cannot be estimated without knowledge of distributions of flow densities and link frequencies. Illustrations also show the importance of network effects even in the largest airline markets. Network design adds another degree of flexibility to the design of transport services: the number of intermediate stops per passenger trip. This affects both cost and service quality. In conclusion it is argued that thin airline markets are too small to need regulation of service or entry because some exploitation must occur to recover costs. Dense markets can support single market competition, although it may be wasteful of resources. Medium markets may support only one carrier. However, medium and even thin markets can be competitively served as part of large airline networks. The growth of air service, then, should tend to be from single-quality single-darrier service to competitive, multistop, network services to nonstop network service, and finally to a broad selection of service/fare options. There is some doubt whether regulation is either necessary or useful in achieving these ends.