Economies of scale and scope in service firms with demand uncertainty: An application to a Spanish port
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Economies of scale and scope in service firms with demand uncertainty: An application to a Spanish port B e a t r i z To v a r a a n d A l a n Wa l l b a
Departamento de Ana´ lisis Econo´ mico Aplicado, Universidad de las Palmas de Gran Canaria, Campus de Tafira, Modulo D, Despacho 2.20., Las Palmas de Gran Canaria 35017, Spain. E-mail: [email protected] b Oviedo Efficiency Group (OEG), Departamento de Economı´ a, Universidad de Oviedo, Avenida del Cristo s/n, Oviedo 33071, Spain. E-mail: [email protected]
A b s t r a c t Although shipping companies assert that the majority of their lines work to a schedule with fixed days of arrival and departure which are programmed on a weekly basis, the demand which container terminals face is characterized by a degree of uncertainty. Up to now, the analysis of cargo handling port activities has given little attention to the relationship between demand variability and firm costs. We analyse how demand uncertainty affects input choices and therefore costs of production. Our results show that demand uncertainty affects port terminal marginal cost and has the effect of increasing the estimates of economies of scale and scope. We conclude that not taking demand uncertainty into account may yield misleading estimates of terminal costs and lead to the wrong conclusions for optimal policy design. Maritime Economics & Logistics (2012) 14, 362–385. doi:10.1057/mel.2012.12
Keywords: demand uncertainty; port terminals; economies of scale and scope; cost function
Introduction Port terminals face uncertainty with regard to the arrival of ships for a variety of reasons including adverse weather conditions, breakdowns and delays at r 2012 Macmillan Publishers Ltd. 1479-2931 Maritime Economics & Logistics Vol. 14, 3, 362–385 www.palgrave-journals.com/mel/
Economies of scale and scope in service firms with demand uncertainty
previous ports due to congestion. The scale of schedule unreliability was illustrated by a study of port container terminals that monitored the arrival of over 5000 ships on 23 trading routes between April and September 2006 and which found that over 40 per cent of the ships arrived one or more days later than planned (Drewry Shipping Consultants, 2006). Delays for a single vessel in a given shipping service roundtrip can impact on round voyages of other ships operating in the same loop, which can lead to irregular service frequencies at a port in the loop with large variations in time intervals between port calls (Notteboom, 2006). Moreover, in response to rising port congestion or unexpected delays, shipping lines may react by reshuffling the order of ports of call on a certain loop or omitting port calls altogether. This can result in terminal operators facing sudden and unplanned peaks in volumes, requiring extra manpower to be hired (Notteboom, 2006; Vernimmen et al, 2007). If terminals are unable to meet demand, ships may suffer unacceptable delays in offloading cargo which, in turn, may lead to shipping companies replacing the terminal with a less congested o
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