Transportation Product, Transportation Function and Cost Functions

Although major advances have been made in the estimation of transportation cost functions in terms of functional specification and microeconomic properties, available studies present inconsistencies with observed industry behavior, and have been criticized as a reliable basis for policy design. In this paper the concept of transportation cost function is restated on the basis of an improved (multi-) output definition. The transportation function is identified as that component of the production function that relates output to characteristics of vehicles, terminals and rights-of-way. Using this framework, cost functions are derived for two simple transportation systems, which illustrates the ambiguity of the aggregate output definition and shows the importance of spatial complementarity in transportation activities. Eventual contradiction between economic wisdom and firms' behavior are shown to be explainable under the multioutput perspective. The implications of output misspecification on the estimation of transportation cost functions are discussed.