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Carriers- Output, Cost and Pricing

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IntroductionWhat does carrier mean?A carrier is a firm that provides a transportation service – moving cargo and/or passengers from one location to another. Who are the carriers?Carrying units Shipping lines and barge carriers, truck carriers and railroad other than power units(tug boats, locomotives, tractors)How does carrier f irm differ from manufacturing f irm?a tangible output and an intangible output. Product at a given location and service that involves changes in locations.Homogeneous and heterogeneous

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ResourcesThe resources uti l ized by carriers (1) vehicles of various sizes: carrying units and power units (2) energy: Petroleum fuel power, electricity, (3) way: water, land, and air area, (4) labour, and (5) terminals (Dedicated terminal and common user terminal)Quality of their service, the measurement of the service output of carriers, and carrier cost characteristics, pricing, and objectives will be discussed. The theory is applicable to any type of carrier that moves cargo and/or passengers to and from ports. The efficiency of a port affects the size of ships that call at the port.

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Operating options

These operating options include Speed of movement –Greater the speed the higher the quality of service. Frequency of serviceReliability of service rather than variability Spatial accessibility of service, and Susceptibility of cargo to loss and damage and passengers to fatal and nonfatal injuries.Environment of the carrying-unit vehicle.Change in the level of operating options

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OutputTon-miles and passenger-miles of service.They can also be the same for the same type of cargo and the same type of passenger but for different distances, tonnage, and numbers of passengers.The rationale for using the ton-mile and passenger-mile as measures of service outputs for cargo and passenger carriers is as follows. In order for cargo transportation service to occur, two parties must be in agreement.In order for passenger transportation service to occur, the passenger must be willing to provide himself to be transported and the passenger carrier must be willing to transport the passenger (thereby incurring vehicle miles).

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CostCost efficiencyCosts can vary with respect to time.Short run costA carrier’s short-run total cost consists of fixed (including depreciation and insurance)and variable costs.

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Short run variable cost is measured vertically from the horizontal axis

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Short run Unit Cost

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Long run Total Cost

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Long run Average Total Cost and Marginal cost

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LATC curve falling continuously as service expands –if output increases by a certain percentage, the carrier Long run costs will increase by smaller

percentage .How to achieve EoS?

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LATC curve rising continuously as service expands –if output increases by a certain percentage, the carrier Long run costs will

increase by larger percentage.

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Constant Return to Scale

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Type of Returns to Scale

The type of returns to scale may also be described by the ratio of LATC to LMC for a given amount of output. Notice that for a carrier exhibiting economies of scale (see Figure 4.4a), LATC is greater than LMC at a given output, i.e., S = LATC/LMC > 1. In Figure 4.4b, LATC is less than LMC for the carrier exhibiting diseconomies of scale, or S < 1. In Figure 4.4c, LATC is equal to LMC for the carrier exhibiting constant returns to scale, or S = 1.

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Cost

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Long run cost: Multiple outputsIt has been implicitly assumed that the carrier provides one type of service, e.g., ton-miles. Suppose the carrier provides a freight service as well as a passenger service, measured in ton-miles and passenger-miles, respectively.How would the carrier determine whether it exhibits economies or diseconomies of scale or constant returns to scale? How would it determine the unit costs of each of the two services?

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Long run cost: Multiple outputsNote that for a single-service carrier, S = LATC/LMC, may be rewritten as S = (LTC/Q)/LMC = LTC/Q∗LMC. By analogy, S for the two-service carrier may be expressed as S = LTC/[Q1∗LMC1 + Q2∗LMC2], where Q1 may represent ton-miles and Q2 may represent passenger-miles . If S > 1, the two-service carrier exhibits economies of scale, i.e., if the amounts of the two services are increased by the same percentage, the long run costs incurred by the carrier will increase by a smaller percentage. If S < 1, the two-service carrier exhibits diseconomies of scale, i.e., if the amounts of the two services are increased by the same percentage, the long-run costs incurred by the carrier will increase by a larger percentage. If S = 1, the two-service carrier exhibits constant returns to scale; the percentage increase in the amounts of the services will result in the same percentage increase in costs.

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Long run cost: Multiple outputsFor a one-service carrier, its long-run unit costs (LATC) are found by dividing LTC by its corresponding quantity (Q). However, for a two-service carrier, its long-run total costs include costs that are incurred by both services, i.e., LTC/Q1 is not the unit cost of ton-miles of service, since the cost of passenger-miles of service is also included in LTC.

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Long run cost: Multiple outputsUnit costs for multiple output carriers can be found by computing the long-run average incremental total costs for the outputs. For example, the long-run average incremental total cost (LAITC1 or unit cost) for ton-miles of service Q1 is the incremental (or addition to) cost incurred by the carrier in providing ton-miles of service divided by these ton-miles.Specifically, the incremental cost of ton-miles of service is the cost in providing both services minus the cost of only providing the other type of service, i.e., passenger-miles of service Q2. If LTC = f(Q1, Q2), then the incremental cost of ton miles of service Q1 is f(Q1, Q2) – f(0, Q2). Thus, LAITC1 = [f(Q1, Q2) – f(0, Q2)]/Q1.Similarly, LAITC2 = [f(Q1, Q2) – f(Q1, 0)]/Q2.

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