On measuring the effect of demand uncertainty on costs: an application to port terminals

Abstract

A recent survey found that 40 per cent of the vessels arrive later than planned, so demand uncertainty is a salient feature of port terminal activity. Terminals facing greater demand uncertainty and who wish to cater for this will incur extra costs to avoid the risk that shipping companies replace them. We estimate a short-run cost function using data on three Spanish port terminals which includes demand uncertainty as a regressor. We find that demand uncertainty has a significant effect on costs and we quantify this. Not taking demand uncertainty into account may lead to port terminals’ efficiency being underestimated.