Transport cost functions, network expansion and economies of scope

This paper shows technically that economies of transport network expansion should be viewed through the concept of economies of scope rather than through the concept of economies of scale. The basic technological dimensions that are specific to transport production are identified. The framework is used to derive explicit cost functions for two and three nodes systems in order to show how the potential technical advantages of network expansions (new nodes served) are transferred into transport cost functions. These advantages are shown to translate into economies of scope that can exist even under constant returns to scale. (C) 2003 Elsevier Science Ltd. All rights reserved.