Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi DiAP – Dipartimento di Architettura e Pianificazione Politecnico di Milano

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi CONTENTS Regulatory considerations Review of the literature Some data Objectives

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Objectives Public transport industry:  often claimed to be dominated by economies of scale  the larger, the better However, many empirical evidences:  larger firms, higher costs This work aims at giving a non-statistical contribution to understand in which circumstances economies of scale, rather than diseconomies of scale, tend to prevail.

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi CONTENTS Regulatory considerations Review of the literature Some data Objectives

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Review of the literature Economies of scale Contribution stressing the existence of economies of scale: Viton (1997), Odeck & Alkadi (2001) Fazioni et al. (1993 & 2003)  economies exist also over 25 Mkm/year Cambini & Filippini (2003)  economies also in medium- sized town firms Buzzo, Margari & Erbetta (2005)  suggest optimal dimensions >500 Mpaxkm/year

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Review of the literature Diseconomies of scale (1/3) Some authors recall the possible presence of diseconomies of scale in larger firms: Levaggi (1994)  diseconomies of scale, in the long term. Uncertain economies in the long term for Fabbri (1998) Preston (1997)  optimal fleet of ~ 100 vehicles only (dimension of subsidaries of the biggest European companies) Fraquelli, Piacenza & Abrate (2001)  optimal dimension of ~ 1000 employees

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Review of the literature Diseconomies of scale (2/3) Ottoz et al. (2005)  diseconomies of scale among italian largest “public companies”; Carminucci et al. (2007)  confirm the use of smaller subsidaries by bigger companies in order to avoid diseconomies of scale; Giordano (2007)  diseconomies of scale over 500 vehicles; Iseki (2008)  diseconomies of scale for any firm size. Small transit agencies merger increase costs; Iacono (2009)  short-run return to size, but long-run diseconomies of scale.

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Review of the literature Diseconomies of scale (3/3) Giordano (2007) also outlines some possible reasons for the presence of diseconomies of scale: high complexity of planning and control which needs more staff at indirect functions; higher contractual power of labour; higher internal hierarchy.  Pure statistical approach might not be enough to explain the phenomenon (Iseki, 2008).

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi CONTENTS Regulatory considerations Review of the literature Some data Objectives

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Some data Simple empirical analysis of 3 datasets from Lombardy, Veneto and Sicily. No statistical significance: disomogeneous dataset. Data is thus intended only to better argument the results of regulation theory and the evidences of case experience

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Datasets Data Set Number of Firms Firm dimension [mln.vehic∙km /year] Lombardy32 Small-Medium (0.32 ÷ 11.84) Sicily7 Medium (2.55 ÷ 22.83) Veneto18 Small-Medium (0.04 ÷ 15.56) Some data

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regression results All datasets. Operative Costs over Produced Service. Some data

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regression results Only Sicily dataset. Operative Costs over Produced Service. Private companies Public company Some data

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regression results Lombardy dataset. Operative Costs over Produced Service and Average Commercial Speed. Operative Costs [€/km] Produced Service [Mkm/year] Average Commercial Speed [kph]. Some data R 2 =

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Characteristics of data Regulatory frameworks (Carminucci et al., 2007): Lombardy: 27 lots were tendered; Veneto & Sicily: direct assignment to incumbent. In Lombardy most tenders were won by incumbents  other aspects seem to be more important at the moment. Firm ownership: Lombary & Veneto: mix of public and private firms; Sicily: one big (regional) operator, numerous small & medium private firms (>50% market share). Some data

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi CONTENTS Regulatory considerations Review of the literature Some data Objectives

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regulatory considerations Economies or diseconomies of scale? At the moment, with < 7 million vehic-km/year, Sicilian private companies are among the cheapest in the country. The history of private companies in Sicily is of some interest to understand the topic of economies of scale. Before 1996: one big private company 1996: big company splits into 5 smaller companies (with 3 owners) After 1996: further mergers with smaller companies, only when economies of scale exist.

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regulatory considerations Economies or diseconomies of scale? Sicilian private companies strategies are based on: externalization of mainteinance operations to small firms, contestable and private; fine tuning on network design; optimisation of turn managment; intensive merging and dismissing activity  search for best network; avoiding diseconomies of scale. Low subsides (0,95 €/km) forced Sicilian companies to achieve some efficiency  issue of dimensions remains central

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regulatory considerations Conclusions Both forces increasing and decreasing the unitary costs of production exist in reality. Economies of scaleDiseconomies of scale reduction of average costs by expansion of production optimization of the network optimization of use of facilities better conditions with suppliers increase of power of labour unions; monopoly conditions  lack of incentives to efficiency; increase in organizational and management costs; maintenance of the monopoly (capture, logrolling, etc.).  Industrial aspects  Regulatory and organisational aspects

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regulatory considerations Conclusions Both private and public firms, subjected to non incentivising regulation and/or even perverse incentives, experience a decrease in efficiency (sometimes even increase of costs) with size  NO: big firms have intrinsecally higher costs  YES: bigger firms are often local monopolies, in which conservative and anticompetitive behaviours tend to prevail  inefficiencies.

Some evidences of diseconomies of scale in bus industry Paolo Beria, Raffaele Grimaldi Regulatory considerations Conclusions Forces going in the direction of unregulated and inefficient local monopoly conditions prevail on industrial economies of scale.

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