Do the Usual Results of Railway Returns to Scale and Density Hold in the Case of Heterogeneity in Outputs? A Hedonic Cost Function Approach

This paper highlights the importance of modelling the interaction between returns to scale/density and heterogeneity of services when evaluating optimal size and structure of passenger rail operations. We propose and estimate a hedonic cost function which allows us to incorporate measures of train operator heterogeneity, which are central to evaluating the cost effect of merging heterogeneous train operators, and thus informing policy. We illustrate our model via three rail franchise mergers/remappings in Britain, and show that the wrong policy conclusion result could be obtained by only considering the scale and density properties, in isolation from heterogeneity.