Transport Economics
for Operations Management
Lecture Notes
International School of Economics Rotterdam, 3rd semester
(Undergraduate level)
 Thomas Cool, June 1998


Introduction            Table of Contents            Download             Literature                Transport links




These lectures provide transport economic concepts and theory that are useful for operations management. Though the word ‘operations’ is in the title, it must be emphasised that these lectures don’t discuss actual operations. As said, they concentrate on transport economic concepts and theory. The reason for this is that these lectures are to be understood in the context of the use of the following books: Alderton (1995), Ballou (1992), Doganis (1992), Muller (1995), Krajewski & Ritzman (1996), which books already provide ample discussion of operations. 

Operations managers are in the business of ‘getting it right’. The products are to arrive at the customer in the right place, at the right time and in the right condition. Krajewski & Ritzman (1996) and Ballou (1992) give a very good overview of the required activities in operations management. 

Though it may not be immediately apparent - for example, Krajewski & Ritzman don’t really discuss it - much of the OM’s job relies on transport economics too. The reason that (transport) economics is important for OM, is that operations management is to be profitable too. If companies were willing to spend zillions of dollars on getting each single product ‘in the right place, at the right time and in the right condition’, operations management would be easy. However, operations managers are limited by their budget, and they have to operate in market conditions where their services are valued at certain prices. And thus it is important for the operations managers to understand basic economics - and transport economics in particular. 

Transport Economics is complicated, since next to time and quantity there now is distance, and there are the pecularities of the various modes of transport. Specific transport phenomena already occur on the factory floor, and others arise in location and distribution. At a higher level, an operations manager would do well to understand something about the national transport policy, for example since the relations to the suppliers might be affected by these. 

The following chapters have been included for the following reasons. 

This introductory chapter gives the basic concepts and tools. There are elementary concepts, and simple relations for elasticities, optimal speed, growth relations. Then there are the many concepts for the measurement of transport activity and capacity utilisation, and the statistical pitfalls in these. 

The second chapter delves deeper into the statistical measures. There is a clear difference between normal economic analysis and transport economics, and an operations manager may go into error when he or she is not aware of that. 

The transport sector tends to have high fixed costs in the short run, and low marginal costs in the short run. This makes for cartels and monopolies - and government regulations. To better understand the world of transport, we look at the basic textbook models of monopoly, a cartel and a duopoly. 

Transport normally uses networks. We discuss network shape, the capacity of a single link, and market segmentation (using links in different manners). Since the shape of the demand function is important in practice, we look at linear, loglinear, logistic and linear-exponential demand. A specific form of market segmentation is peak load pricing, and it is interesting to see how this model can be relevant for the distinction between first class and economy class in air transport. 

These lecture notes conclude by lists of exercise questions and real exams. 


Table of Contents

Elementary concepts
Simple elasticity of area expansion
Simple optimal speed
Some growth relationships Doubling periods
Perpetual depreciation
Basic measurement units
Capacity and utilisation
Empty runs
Maximal profit speed
2. Relating economic sectors to transport Chain indexing
Relation to transport
3. Monopolies, cartels and duopolies Profit maximisation with market power
4. Networks, capacity and market segmentation Networks
Network design and capacity
Single link capacity
Market segmentation The loglinear function
The linexp function
The logistic function
Peak load pricing
5. Exercise questions Transport in general
Sea Transport General industry knowlegde
Basic skills
Some data
Simple questions for Air Transport
Example question for a case study
Questions, no answers provided here Transport theory
Intermodality, Rail, Road, Barges and Pipe
Air transport
Sea transport
Answers Answers Transport in general
Answers for Sea Transport
Answers for Air transport
6. Exams TRE 632: Road freight, rail, pipe and intermodality Question 1: Definitions (10 points)
Question 2: Basics (15 points)
Question 3: Columbus Carrier (25 points)
Question 4: Columbus Carrier profit (25 points)
Question 5: Columbus Carrier Good Fortune (25 points)
TRE 633: Sea transport Question 1: Definitions (25 points)
Question 2: Basics (25 points)
Question 3: London - San Francisco (50 points)
TRE 634: Air transport Question 1: Definitions (25 points)
Question 2: Basics (25 points)
Question 3: Pooling MOU (25 points)
Resit TRE 632: Road freight, rail, pipe and intermodality Question 1: Definitions (15 points)
Question 2: Basics (30 points)
Question 3: Columbus Carrier Revisited (55 points)
Resit TRE 633: Sea transport Question 1: Basics (40 points)
Question 2: Tramp revenue max (40 points)
Question 3: Worldwide Panic Inc. (20 points)
Resit TRE 634: Air transport Question 1: Definitions (20 points)
Question 2: Basics (40 points)
Question 3: Pooling MOU Revisited (40 points)
Answers TRE632 Road freight, rail, pipe and intermodality
TRE 633 Sea
TRE 634 Air
Resit TRE 632 Road freight, rail, pipe and intermodality
Resit TRE 633 Sea
Resit TRE 634 Air

Appendix: Transport links on the internet

Download (Word for Windows, Office 97, and then zipped):

Lecture Notes, Part A (Ch 1 - 4) 217 KB
Lecture Notes Part B (Ch 5 - App.) 90 KB
Note: When writing these notes, I used Mathematica to make the mathematics consistent,
to develop examples and to plot the various graphs. See the relevant packages and notebooks.


Adviesdienst Verkeer en Vervoer (AVV) (1997), “Vervoer-Economische Verkenningen 1997-2002”, Sdu
Alderton (1995), “Sea transport”, Reed, 4rth edition
Ballou (1992), “Business logistics management”, Prentice Hall
Button (1993), “Transport economics”, Edward Elgar
Doganis (1992), “Flying off course. Economics of international airlines”, International Thompson, 2nd edition
Krajewski & Ritzman (1996), “Operations Management”, Addison Wesley 4th ed
Muller (1995), “Intermodal freight transportation”, Intermodal Association of North America (IANA) and the Eno Transportation Foundation, 3rd edition
Nei (1997), “ATTACK 2.0 Gegevensdocumentatie”, Rotterdam
Wijnolst & Wergeland (1996), “Shipping”, DUP
Wit, de & Van Gent (1986), “Vervoers- en verkeerseconomie”, Stenfert Kroese

Appendix: Transport links on the internet