Operating costs and market organization in railway services: the case of Italy, 1980-1995

We estimate a transcendental logarithmic (translog) short-run variable cost function for the Italian railway company, Ferrovie dello Stato (FS), using data on the years 1980-1995. Within the study period, we show that: (a) the translog function represents a good approximation of the underlying technology of FS; (b) all production factor demands are inelastic; (c) FS has a limited ability to substitute between inputs; (d) FS operates with diseconomies of density. A major implication of these findings is that the rail network is not used optimally, so that either a cut in the frequency of trains or a rise in capital investments seems to be indicated. Since the estimated cost function is super-additive at the relevant output levels, we derive that rail service provision in Italy would not behave as a natural monopoly in the absence of regulation. Indeed, allocative efficiency indicates that there is enough room for a duopolistic industry where joint or specialized production of passenger and freight carryings would be pursued, mainly depending on firm size.