Economies of scale and scope in service firms with demand uncertainty: an application to a spanish port

Abstract

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.