metadata: authors: 0: author: Tae H. Oum
1: author: Waters, W.G.
2: author: Jong Say Yong
docna: 0: docna: A survey of recent estimates of price
            elasticities of demand for transport
docty: Policy Research Working Paper
subtopic: City to City Alliances,National Urban Development Policies & Strategies,Regional Urban Development,Urban Economics,Transport Economics Policy & Planning,Urban Economic Development,Energy and Mining,Transport Services,Intelligent Transport Systems,Urban Communities
teratopic: International Economics and Trade
abstracts: cdata!: This paper reviews 70 estimates of the
            price elasticity of demand for many different transport
            modes and market situations. The paper presents figures
            separately for passenger and freight transport and include
            estimates of both own-price and mode choice elasticities. It
            also presents some elasticity estimates on demand for
            gasoline, together with selected cross-price elasticities.
            In addition, it includes a brief exposition on the different
            concepts of elasticity - compensated, uncompensated, price,
            cross-price and mode choice - and discusses the relations
            between them. This paper shows that, since transportation is
            a derived demand, it tends to be inelastic. Although the
            review is confined to estimates of price elasticities, it
            notes that quality variables are often more important than
            price, particularly in the air, motor freight, and container
            markets. Finally, most of the estimates relate to developed
            countries, reflecting the availabilty of data, research
            resources, and domicile of the researchers. The elasticity
            estimates are nevertheless thought to be relevant to
            developing countries as well. But since intermodal
            competition is generally less intense in developing
            countries, this tends to make transport demand more
            inelastic, although the lower income levels in such
            countries may partly offset this effect.
repnme: repnme: A survey of recent estimates of price
            elasticities of demand for transport
display_title: A survey of recent estimates of
            price elasticities of demand for transport
listing_relative_url: /research/1990/01/700347/survey-recent-estimates-price-elasticities-demand-transport
topicv3: Transport m1326661 135,Transport Economics m1326662 162,Urban Development m1327371 699,Iron m1503514 2931,Traffic Management m1583399 4231
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Policy Plan & Prog Review Dept
no_of_pages: 61
model_extractions: <!-- Start of picture text --> Plc,Plannlng, and Research<br>TransprlatlonI<br><!-- End of picture text -->

- This paper a product of the Transportation Division, Infrastructure and Urban Development Department - forms part of an ongoing project in PPR on Pricing, Cost Recovery, and Efficient Resource Use in Transport. It assembles empirical evidence on **Lhe** broad order of magnitude of the price elasticities of demand for transport on the assumption that optimal departures from marginal cost prices are set in relation to the inverse of these elasticities. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Wendy Wright, room S 10-055, extension 33744 (34 pages with figures, tables, and appendices, plus 22 pages of an annex).

Oum, Waters, and Jong review 70 estimates of the price elasticity of demand for transport published in recent joumal articles, estimates covering many different transport modes and market situations and employing vanous statistical methods and data bases.

The authors present figures separately for pass^nger and freight transport and include estimates of both own-price and mode choice elasticities 5 in the form of a range and a "most likely" estimate. They also present some elasticity estimates on demand for gasoline, together with selected cross-price elasticities (th' :mpact on demand for one mode of transport resulting from a change in the price of another). In addition, they include a brief exposition on the different concepts of elasticity - compensated, uncompensated, price, crossprice, and mode choice - and discuss the relations between them.

The authors show that, since transportation is a derived demand, it tends to be inelastic. Exceptions are discretionary travel and some freight shipments subject to intermodal competition. Although the review is confined to e mates of price elasticities, it notes that quality variables are often more important than price, particularly in the air, motor freight, and container markets. Finally, most of the estimates relate to developed countries, reflecting the availability of data, research resources, and domicile of the researchers. The elasticity estimates are nevertheless thought to be relevant to developing countries as well. But since intermodal competition is generally less intense in developing countries, this tends to make transport demand more inelastic, although the lower income levels in such countries may partly offset this effect.

The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.

Produced at the PPR Dissemination Center
# A **Survey** of **Recent Batimteu** of Price **Elasticities** of **Demand** for Transport

## TABLE OF CO6N1TS

||Page|
|---|---|
|I.<br>Introduction............<br>.<br>....<br>......<br>.<br>..................|...<br>I|
|II.<br>Sources of Demand Studies<br>..........<br>..............<br>. .|1|
|III.<br>Concepts of Elasticities...............<br>.............<br>. . . . .|2|
|XV.<br>Estimates of Price Elasticities<br>.<br>....**<br>..........<br>**..|9|
|V.<br>Conclusion.....<br>..<br>.<br>.. .<br>...<br>..<br>. ...|13|
|FigureI1...........0....e......<br>.....|15|
|Tables||
|1<br>Surin-ry<br>Statistics<br>.............................<br>.16||
|2.<br>Elasticities of Demand for Passenger Transport .......|17|
|3.<br>Elasticities of Demand for Freight Transport .........|18|
|4.<br>Elasticities of Demand for Gasoline .................|. 19|
|5.<br>Selected Estimates of Cross Elasticities .............|20|
|References.......<br>..<br>.<br>......<br>........|21|
|Appendix 1 List of Journals Scanned<br>.<br>.<br>...|23|
|Appendix 2 Complete List of Elasticity Estimates<br>.......<br>...|24|
|Appendix 3 Inferring Ordinary Demand Elasticities for<br>Mode Choice Elasticities<br>..<br>.<br>......|25|
|Annex A<br>An Annotated Bibliography of Recent Estimates of<br>Price Elasticities of Transport Demands..<br>.....|A.1|
|Bibliography for Annex A.........<br>.<br>.............|A.18|

This paper was prepared as part of a project on Pricing, Cost Recovery and Efficient Resource Use in Transport. It was prepared hy Tae H. Oum, W.G. Waters II and Jong Say Yong from the Center for Transportation Studies, University of British Columbia under the direction of Ian G. Reggie, INUTD.
# A Survey of **Recent Zstinates** of **Price Elasticlties** of **Demand** for Transport

# I. Introductlon

There have been numerous empirical studies of the demand for transport in the past decades. With advances in computer technology, many previously inapplicable or impractical econometric methods have been applied to the field of transportation. Researchers have become more aware of pitfalls whlch can undermine empirical studies. In recognition of advances, in the ability to estimate demand functions, this survey concentrates on the major empirical studies of own-price elasticities of demand for transport that emerged in the last ten years or so. As the title of this paper suggests, only studies which contain empirical results are included. We also omit most survey papers, but generally we include studies mentioned in these surveys. For example, the review article by Winston (1985) is not recorded in our survey, but all the demand articles cited therein are included in this revlew.

# 1I. Sources of Demand Studies

With the emphasis on more recent studies, most of the studies reviewed are those which appeared in the 1980s. We have included a few studies that date back into tbe 19709, primarily because of their importancb in the literature. The earliest study included in this paper is the work by McFadden (1974). Our survey does not go back earlier hence empirical estimates published in the 1960's (e.g., the 'abstract mode' model by Quandt and Baumol, 1966) are not included.

The majority of the studies reviewed are journal articles, for the simple reason that this is the avenue moot authors use in comwunicating their research findings. We include a few studies not reported in academic journals. These entries generally are for modes or markets for which we did not find empirical estimates of elasticities ln the published academic literature.

The l1terature review began with the collection of journal articles in Waters (19P,4, 1989). Because only articles appearing in major economics journals
2 are included in Waters' collection,l/ we also searched most major journals pertaining to the field of transportation. Among these are Transportation Resetrch Series A and B, Transportation, Transportation Quarterly, Transportation Journal, and Logistics and Transportation Review (a list of journals scanned is included below as Appendix 1). As noted, a few other sources were used, e.g., government reports. The search for these entries was much less extensive.

A total of 70 entries (journal articles, reports and books) were reviewed and summarized in a report appended to this paper. In view of the vast literature related to transport demand, some omissions are inevitable. Nonetheless, the articles reviewed provide a basis for identifying 'typical' price elasticities of demand for transportation.

Some suimary statistics about the review are reported in Table 1. The articles and studies are drawn from several countries, cover many different modes and market situations, and employ various statistical methods and data bases. The individual articles are suimarized in the annotated bibliography attached to this survey as Annex A.

# ITT. Concepts of Elasticities

The basic concept of an elasticity and its application to demand are well known. An elasticity is the percentage change in one variable in response to a percent change in another. In the case of demand, the own-price elasticity of demand is the percentage change in quantity demanded in response to a one percent change in price. The own-price elasticity of demand is expected to be negative, i.e., a price increase decreases the quantity demanded. Demand is said to be 'price-elastic" if the absolute value of the own-price elasticity is greater than unity, i.e., a price change elicits a more than proportionate change in the quantity demanded. A 'price-inelastic' demand has a less than 1 Waters' bibliography covers 40 economic journals. It includes the Journal of Transport Economics and Policy, International Journal of Transport Economics as well as some journals related to regional and urban economics.
3 proportionate response in the quantity demanded to a price change, i.e., an elasticity between 0 and -1.0.

Economists distinguish between two concepts of price elasticities: *ordinary* and "compensated" demand elasticities. We explain the distinction separately for consumers' demand in contrast to input demands such as freight transport demands. For a consumer demand such as the demand for leisure travel, a change in price has two effects, a substitution effect and an income effect. The substitution effect is the change in consumption in response to the price change holding real income (utility) constant. A change in price of a consumer good or service also has an income effect, i.e., a reduction in price means a consumer has more income left than before if the same quantity were consumed. Thip change in real income due to the price change will change consumption (it could be positive or negative depending on the relationship between income and consumption).2/ The compensated elasticity measures only the substitution effect of a price change along a given indifference surface (Hicksian demand), whereas the ordirary demand elasticity measures the combined substitution and income effects of a price change (Harshallian demand).

The principles are the same for freight transport demands although the terminology differs. A change in the price of an input to a production process, such as freight transport, has a substitution effect as well as a scale or output effect. The substitution effect is the change in input use in response to a price change holding output constant. But a reduced price of an input increases the profit maximizing scale of output for the industry (and firms in the industry) which, in turn, increases demands for all inputs including the one experiencing the price change. As with passenger demands, a compensated elasticity measures only the substitution effect of the price change, while an ordinary elasticity measures the combined substitution and scale or output effects of a price change.

2 An income elasticity refers to the percentage change in quantity demanded accompanying a given percentage change in income, prices held constant. No income elasticities are reported in this study.
4 It is important to recognize that for measuring the ordinary price elasticities for freight demand, the freight demand system must be estimated simultaneously with the shippers' output decisions, i.e., treating output as endogenous. Ignoring the endogeneity of shippers' output decisions is equivalent to assuming that changes in freight rates do not affect output levels. This, in turn, is equivalent to ignoring the secondary effect of a freight rate change on input demand caused by the induced change in the level or scale of output. Because most of the freight demand models reviewed in this survey do not treat this secondary effect properly, the price elasticity values reported here may be biased. Since the mid-1970s, many economists have estimated neoclassical input demand systems by deriving them from the firm's or industry's cost (production) function, often specified in a translog or other flexible functional form (for example, Oum 1979b and 1979c, Friedlaender and Spady, 1980, and Spady and Friedlaender, 1978). However, most of these models are derived by minimizing the input costs (including freight transport costs) for transporting a given (exogenously determined) output, and thus yiea.d compensated demand elasticities rather than ordinary demand elasticities. Therefore, the elasticities reported in such studies are not directly comparable with those of other studies. The freight demand study by Oum (1979c) is an exception in that he computes the ordinary price elasticities by adding the effects on demand of the changes in output scale induced by a freight rate change to the compensated price elasticities computed from the neoclassical freight demand system. Therefore, his ordinary price elasticities are comparable with those of others. Because virtually all freight demand studies report something close to ordinary demand elasticities, that is the appropriate interpretation of the results in this survey.

Passenger demand models normally are derived by maximizing, explicitly or implicitly, the utility function subject to the budget constraint. These give ordinary price elasticities, i.e., they include both ince-.a and substitution
5 offecta.X Because virtually all passenger demand studies report ordinary demand elasticities, that is the appropriate interpretation of the results in this survey.

The own-price elasticity is distinguihed from cross-price elasticities. The latter is the percentage change in qnwa:.;ity demanded, say rail traffic, in response to a percentage change in the price of another service such as trucking. For substitutes, the cross-price elasticity for compensated demand is positive. If two products were unrelated to one another in the minds of consumers, the cross-price elasticity of the compensated demand would be zero, and cross-price elasticities are negative for complementary goods and s".vices.

t is important to distinguish between the overall market elasticity of de_ l for transportation and the demand facing individual modes of transport. The market demand refers to the demand for transportation relative to other (non-transport) sectors of the economy. The price elasticity of demand for individual modes is related to but different from the market elasticity of demand. Under the usual aggregation condition (i.e., conditions for existence of a consistent aggregate), the linkage between mode-specific elasticities (ownprice elasticity Fii and cross-price elasticities Fij) and the own-price elasticity for aggregate transportation demand (F) can be written as 41:

-

- (1) F EiSi (Ej Fij)

where Si refers to the volume share of mode i.

- 3 If one derives passenger demand by minimizing consumer's expenditure function for achieving a given utility level (or simply apply Hotelling's lemma to the expk<sup>4</sup> iture function to derive the demand functions), then the resulting des function would be a compensated one (i.e., changes along an indifference frontier).

- 4 In a simple two mode case, it becomes: F - S1*(F11 + F12) + S2*(F21 + F22).
6 The above relationship indicates that the own-price elasticity of aggregate transport demand for a particular market is lower, in absolute value, than the weighted average of the mode-specific own-price elasticities because of the presence of positive cross-price elasticities among modes. The relationship among the concepts of price elasticities are illustrated in Figure 1. Note that, because the number of modes can differ across studies and cross-price elasticities differ as well, the own-price elasticity estimates from different studies may not be strictly comparable.

One could also focus on own- and cross-price elasticities facing individual firms. These differ from modal or market elasticities of demand. Firm elasticities vary considerably depending upon the extent and nature of competition.51 Empirical estimates of transportation demand rarely focus on demand elasticities facing individual firms, hence we do not consider them turther in this review.

There is also a distinction between short-run and long-run price elasticities. In the long run consumers (or firms) are better able to adjust to price signals than in the short run. Hence long run demand functions tend to be more elastic (less inelastic) than short run demand. Unfortunately, few studies are explicit about the time horizon of their elasticity estimates.

Concepts of demand elasticities for transportation are further complicated by mode choice (mode split, volume share) elasticities.A/ Many transportation The elasticity of demand facing a firm depends greatly on the nature of competition between firms, e.g., Cournot quantity game, Bertrand price game, collusion, etc. A growing number of economists have looked at the price sensitivity of demand facing a Zirm within the framework of conjectural variations. See Appelbaum (1982) and Slade (1984). As far as we are aware, the only example of this kind applied in transport pricing is Brander and Zhang (1989) to inter-firm competition between duopoly airlines in the U.S.

6 In many of the early studies of mode choice, logit models were applied to route (or regional) aggregate market share data. Application of a logit model to aggregate data not only leads to a loss of important information about changing market size in response to a price change, it also has a serious theoretical inconsistency as analyzed by Oum (1979).
7 demand studies **are** mode choice studies, i.e., studies which predict shares of a fized volume of traffic among modes **and** investigate users' mode choice behavior. These produce own-prLce and cross-price elasticities between modes but they differ from ordinary demand elasticities described above In that they do not take into account the effect of a transport pricre change on the aggregate volume of traffic. One can derive mode-split elastici ies from ordinary elasticities but this entails a loss of information, ard thus rarely would be a useful exercise. Because ordinary price elasticities generally are more useful than mode split elasticities, it is desirable to be able to convert mode choice elasticities to ordinary elasticities.

The relationship between mode choice (or share) elasticities and ordinary demand elasticities can be summarized by the following formula (see Taplin, 1982, and Quandt, 1968).

(2) **-ij** - Mij + ej for all i and j.

where Fi1 is the price elasticity of the ordinary demand for mode i with respect to price of mode J, Mij is the mode choice elasticity of choosing mode i with respect to price of mode J, and ej is the elasticity of demand for aggregate traffic (Q, including all modes) with respect to the price of mode j. Because information on ej's usually are not available, the following formula may be used to compute them.

where F is the price elasticity of aggregpte transport demand ([Q/6P]*(P/QIl, and [bP/bPj]*CPj/P] is the elasticity of aggregate transport price P with respect to the price of mode j. Therefore, an explicit conversion of a mode choice elasticity to an ordinary price elasticity of demand for a mode requires information about either the elasticity of aggregate transport demand with respect to price of each mode (Ej) or the price elasticity of aggregate transport demand (F) and the second term in equation (3). Unfortunately, this inrormation
8 is not available in the studies reviewed. As a consequence, Lt is virtually impossible to draw on the extensive mode choice literature to help establish likely values of ordinary demand elasticities. However, a special case of equation (2) for the expression for own-price elasticity, Fii - Hii + e indicates that, in terms of absolute value, the own-price mode choice elasticity (Mii) understates the ordinary own-price elasticity (Fii) because ei is negative. The size of the difference, ei - Fii - Mi. can not be determined without further information.71 However, this tells us that the own-price elasticities for mode choice are the lower bounds for ordinary elasticities in terms of absolute values.

Taplin (1982) pointed out that it is not possible to derive ordinary elasticities unambiguously from mode split elasticities without further information. He suggested that estimates of ordinary elasticitiels could be constructed using equation v) in cor.junction with an assumed value for one ordinary demand elasticity, and variot.a constraints on elasticity values based on theoretical interrelationships among a set of elasticities. This is illustrated in Appendix 3. However, the accuracy of ordinary price elasticities computed this way depends heavily upon the validity of the ordinary elasticity term chosen to initiate the computation.

Finally, we should emphasize that this review is confined to estimates of the sensitivity of transport demands to price. In many markets, particularly for higher valued freight and passenger travel, quality variables may be more important than price. Indeed, the thriving air, motor freight and container markets are testimony to the importance of service quality relative to price in many markets. This review has not looked into "quality elasticities', but this is not to suggest that they are not important.

Taplin (1982) notes that the sum of these "second stage elasticities," E ej, is the price elasticity of the aggregate demand in equation (1).
9

# **IV. Estimates** of Price **Elasticities**

The price elasticity estimates for various passenger and freight demands for traneport are presented in Tables 2 and 3. Appendix 2 provides a more detailed listing of price elasticity estimates, and Annex A is an annotated bibliography of the studies reviewed in connection with this study.

The first sub-section below comments briefly on our summary of elasticity results. Subse,quent sub-sections comment on the variability of estimates of transport demand elasticities across different studies, and how we arrived at a 'most likely' range of price e asticities of demand for various transport markets.

# A. Simary of elasticity results

Tables 2 and 3 report both own-price as well as some mode choice elasticities. As noted earlier, mode choice elasticities can be linked to ordinary demand elasticities providing sufficient information is available. Unfortunately, virtually no mode choice study reports the required information. As a result, we were unable to convert mode split elasticities to ordinary elasticities. We present mode choice elasticities in brackets in Tables 2 and 3 (and in separate columns in Appendix 2). It is important to recognize that the mode split elasticities are not directly comparable to the ordinary ownprice elasticities (the mode choice own-price elasticities underestimate corresponding ordinary own-price elasticities).

Some elasticity estimates for a relevant but mode-specific market, the demand for gasoline, are presented in Table 4 below. Most of the estimates in this table are taken from the survey paper by Blum, Foos and Gaudry (1988). They surveyed a total of 21 studies.

The focus of this survey is on the own-price elasticity of demand. We did not emphasize cross-price elasticities in our review. Unlike own-price elasticities, we find almost no ability to generalize about cross-price elasticities. They are very sensitive to specific market situations and to the
10 degree of aggregation of the data. Examining differences in cross-price elasticities across studies is likely to reflect primarily the differences in data aggreaation among the studies rather than systematic properties of crosselasticity values. Nonetheless, we selected a few cross-price elasticity estimates from studies with a relatively high degree of aggregation (thus more representative of "average" conditions). These results (from Oum, et al.) are reported for passenger and freight markets in Table 5. We reemphasize that this table draws from only a few articles and that one must be cautious in generalizing about cross-price elasticities in transport.

# B. the variability of elasticity estimates

A notable featurp of the elasticity estimates is the wide range of values in most cases. Many factors may have contributed to this diversity, among them ares

- (1) Sam studies fail to control for the presence of intermodal competition. As a result, the own-price elasticity estimates reflect, in part, the intensity of intermodal competition. If the prices of competitive modes change in the same direction as a mode's own-price, then the own-price elasticities are underestimated.

- (ii) Failure to recognle the presence of multicollinearity, autoregressive errors and other specification problems. In a few cases we feel that there is a high probability of model misspecification, hence empirical estimates may not be reliable.

- (iii) Different functional foram used. It is demonstrated in Oum (1989) that, with the same set of data, different functional forms could result in widely different elasticity estimates.
11

- (iv) Different definitions of variables **used.** For esample, some studies use real vehicle operating costs while others use the nominal values, and some studies normalize costs by income while others do not.

- (v) Different time periods and locations. It is well-known that a long run elasticity is higher than a short-run elasticity because users have more time to adjust to price changes. In addition, data drawn from different countries may show markedly diiferent elasticity estimates. In general, we expect that elasticity estimates for developing countries tend to be less elastic due to their less competitive market structure compared to industrially advanced countries.

- (vi) The degree of aggregation. As more disaggregated markets are investigated, the range of elasticity estimates tend to widen because individual estimates will reflect quite unique market conditions. Aggregation 'averages out' some of the underlying variabilities of price sensitivity in different markets.

The many sources of variability and differences in interpretation of elasticity estimates make it difficult to generalize about probable values for elasticities. Nonetheless, Tables 2 and 3 include our estimaLss of *most likely" values for own price elasticities in various markets.

# C. Most likely values of price elasticities

In Tables 2 and 3, we construct a 'most likely' range of elasticity estimates. It is subjective but based on a number of considerations in reviewing the many demand studies. First, some of the extreme values for elasticities were eliminated. We did not automatically eliminate references just because their results seemed out of line. Rather we reviewed the approach or types of data employed to see if that might influence the magnitudes of elasticity estimates. For example, in the case of air passenger travel, the elasticity estimates of Hensher and Louviere (1983) were omitted from consideration because the study was based on inflight interview data of a single airline for a single route. These results are not directly comparable to other studies which estimate a
12 market demand elasticity. Some other examples with seemingly high elasticities had quality of service attributes included in their estimate of price elasticities.81 Where numerous studies are available, this generates a wider range of estimates but gives us more confidence in narrowing the most likely range. Also note that the distribution of elasticity estimates for a category are often concentrated within a narrow range, and this is taken into account in identifying the most likely range.

Where only one or two studies are available for a category, and where they are single estimates or only a narrow range reported, we generally postulate a wider "most likely" range than that reported in our small sample. In a few cases, particularly for specific commodity classifications, we do not venture an opinion on a most likely range for the elasticity.

Tables 2 and 3 include some mode choice elasticities. Unfortunately, it was not possible to transform mode choice elasticities into ordinary elasticities. Nonetheless, we tried to give some recognition of mode choice elasticities in constructing our "most likely" range of ordinary elasticities. Mode choice own-price elasticities are less than ordinary own-price elasticities, and occasionally this would influence our choice of an upper- or lower-bound for our most likely range.

For the most part, we were unable to categorize the various elasticity estimates as "short run" or "long run." Most studies make no reference to the

- 8 The elasticities of air passenger demand estimated by Anderson and Kraus (1981) were excluded. They estimate a "full price" elasticity, one where the monetary value of quality of service is included in the definition of price. That is, their elasticities incorporate both fare and quality elasticities, whereas our survey is confined strictly to the own-price or fare elasticity. Similarly, the freight demand elasticities estimated by Friedlaender and Spady(1980) were excluded because some quality of service attributes were included in their price elasticity estimates.
13 implied time horizon.9<sup>1</sup> As a rough guide, cross-sectional data sets are thought to represent long run relationships whereas time series data (especially if monthly or quarterly data are used) reflect short run demand relationships. But this is not an unambiguous guide, and panel data sets (combined cross-section and time series data) further complicate interpreting the time dimension of elasticity estimates. For those demand categories with several elasticity estimates, we compared elasticity estimates for different data sets. The pattern is not clear. There is a tendency for cross-section data to produce more elastic (less inelastic) estimates, but there is no precise relationship. Consequently, our 'most likely" range of elasticities is ambiguous concerning the implied time horizon, but we expect that the upper range of our range (in absolute values) corresponds to long run as opposed to short run elasticities.

# V. Conclusion

Not surprisingly, because transportation is a derived demand, it tends to be inelastic. But there are exceptions, such as discretionary travel and some freight shipments. Our interest in this review is in own-price elasticities, i.e., the sensitivity of shippers or travelers to the price charged for transportation service. We exclude quality of service elasticities and, for the most part, cross-price elasticities from our review. Many demand studies investigate markets where there is competition from other modes. Even if the overall demand for transport by shippers or travelers is highly inelastic, the presence of competition generally causes the own-price elasticity of demand for a specific mode to be less inelastic than for the market as a whole. Therefore if one were interested in the overall or market price elasticities of demand for transport, we judge that they would be toward the inelastic end of the spectrum of empirical estimates we have surveyed.

The majority of studies are from developed countries. Presumably this reflects the availability of data, research resources, and domicile of those 9 This is in contrast .o estimates of cost functions which almost always state explicitly whether short run or long run interpretations are involved.
14 doing the research. The empirical estimates of price elasticities are expected to be relevant to developing countries as well, subject to some caveats. The first general caveat is that specific values for elasticities can vary significantly from one market situation to another, therefore one must be cautious in generalizing from one situation to another whether it is in a developed or developing country. Second, a likely difference is that the degree of intermodal competition generally is much less intense in developing countries. This would tend to make transport demands more inelastic in developing countries. A third qualification is that the price elasticity of demand may differ according to income levels. One might argue that lower income groups would tend to be more price sensitive, although it is equally plausible that lower income groups have fewer transportation options thus inelastic demands. Given the diversity of market conditions in different countries for different travel or commodity markets, we do not think a broad generalization is possible.
15 aggregate or market pi elasicIty of demand for tansportaton <!-- Start of picture text --> F 4-- possible cross-price<br>eastIcItes with respect to<br>non/transport sectors<br>own price own prke<br>elasticity for eascity for<br>mode I mode 2<br>F11 4-* cross-price -- ) F22 4 Note:<br>elasticitis F - S1(F11+F12) + S2(F21+F22)<br>F12, F21<br>l Note: Mode split elasticities<br>elastic |as ~clng Mg are different from ordinary<br>liustion dUis R Ue. h ascies<br>own- anci cross-price<br>elasticities faclng<br>Incidividuai firms<br><!-- End of picture text -->

UusadondtoRfbffi **Among** Price **Bak*Es dloOmd** for **Aggrega Tfunpot MwkU Modes** aid **lnMd Fim** s
16 Table 1: Summary Statistics

|Total Number of Studies Reviewed|70|
|---|---|
|Freight|17|
|Passenger|49|
|Others|4|
|Single Modal Studies|37|
|Multimodal Studies|27|
|Others|6|
|Air"<br>|20|
|Auto<sup>4</sup>|18|
|Shipping"|5|
|Railu|24|
|Tmcka|8|
|Public Transit'|22|
|others'|3|
|Time Series|25|
|Cross Section|33|
|Panel Data and Pooled Time Series and Cross Section Data|3|
|Others (including unknown data sources)|9|
|United States|32|
|Canada|8|
|United Kingdom|8|
|Australia and New Zealand|7|
|Europe (excluding United Kingdom)|3|
|Brazil|2|
|India and Pakistan|2|
|Othersb|8|

'The number of studies in this classification do not sum to the total elsewhere because a single study is counted more than once in the case of multimodal studies.

bincluding multicountry studies and studies with unknown data sources.
17 Table 2: Elisticities of Demand for Passenger Transport

||(All elasticity fi<br>|gures are negativ<br>|e)||
|---|---|---|---|---|
||RRan<br>S|e<br>urveyed|||
|Mode<br>|<br><br>Market Demand<br>Elasticities|<br><br>Mode Choice<br>Elasticities|Most Likely<br>Range|No. of<br>Studies'|
|Air:|||||
|Vaation|0.40-4.60|0.38|1.10-2.70|8|
|Non-Vacation<br>|0.08-4.18<br>|0.18<br>|0.40-1.20<br>|6<br>|
|Mfixed'|0.44-4.51|0.26-5.26|0.70-2.10|14|
|Rail: Intercty|||||
|Leisure<br>|1.40<br>|1.20<br>|1.40-1.60<br>|-<br>2<br>|
|Business|0.70|0.57|0.60-0.70|2|
|Mixed'|0.11-1.54|0.86-1.14|0.30-1.18|8|
|Rail: Intracity|||||
|Peak|0.15|0.22-0.25|0.20-0.40|2<br>|
|Off Peak|1.00|n..|<1.00|1|
|All Day'|0.12-1.80|0.08-0.75|0.10-0.70|4|
|Automobile:<br>|||||
|Peak|0.12-0.49|0.02-2.69|0.10-0.70|9|
|Off Peak|0.06-0.88|0.16-0.96|0.20-1.10|6|
|AD Day'|0.00-0.52|0.01-1.26|0.10-1.10|7|
|Bus:|||||
|Peak|0.00|0.03-0.58|0.10-0.70|6|
|Off Peak<br>|1.08-1.54|0.01-0.69|0.10-1.10|3|
|AllDay'<br>|0.10-1.62|0.03-0.70|0.10-1.30|11|
|Rapid Transit:<br>|||||
|AUl Day|0.05-0.86|n.a.|0.20-0.90|5|
|ransit System:|||||
|Peak<br>|0.00-0.29|0.1|0.10-0.30<br>|4|
|Off Peak|0.32-1.00|n1.a.|0.30-0.50|3|
|All Dayb|0.01-0.96|_Dn._|0.10-0.70|10|
|Otherse|||||
|Minibus|n.a.|0.10||I 1|
|Aircraft Landing|0.06-0.56|_nA._||1|
|The distinction bet<br>|ween vacation and n<br>|on-vacation route<br>|s are rather arbitr<br>|ary in<br>|
|most studies. This m<br>reported.|ay partly account fo|r the very wide ran|ge of elasticity esti|mates|

'This category includes studies that do not make the distinctions.

'The number of studies in this column do not sum to the total because some studies report more than one et of estimates.

nA. = not available
18 Table 3: Elasticities of Demand for Freight Transport

|(AUl elastic|ity figures are neg|ative)||
|---|---|---|---|
|Mode<br>|Range SurveyedI|Mt Li}y Rang|e No of Studies<br>I|
|_Bail:_<br>.||||
|**Aggregate**Commodities|O.6-1.52<br>(0.09-1.79)|0.40-1.20|4|
|Aaembled Automobiles|0.65-1.08|0.70-1.10|2|
|Chemicals|0.39-2.26<br>(0.66)|0.40-0.70|3|
|Coal|0.02-1.04|0.10-0.40|2|
|Corn, Wheat, etc.|0.52-1.18|0.50-1.20|3|
|Fertilisers|0.02-1.04|0.10-1.00|1|
|Foods|0.02-2.58<br>|0.30-1.00|9|
||(1.36)|||
|Lumber, Pulp, Paper, etc.|OOS-1.97<br>(0.76-0.87)|0.10-0.70|7|
|Machinery<br>|0.61-3.55|0.60-2.30|3|
|Paper Plsie and Rubber||||
|,<br>Product|0.17-1.85|0.20-1.00|4|
|Primary metals snd Metallic||||
|<br>Products|0.02-2.54'<br>(1.57)|1.00-2.20|5|
|Refined Petroleum Products|0.53-0.99|0.60-1.00|3|
|Stone, Clay snc Glass Products|0.82-1.62<br>(0.69)|0.0-1.70|4|
|**Aggregate**commodities|0.05-1.34|0.70-1.10|1|
|Asembled Automobiles|0.62-0.67|0.56-0.70|1|
|Chemical|0.98-2.31|1.00-1.90|2|
|Corn, Wheat, etc.|0.73-0.99|0.70-1.00|2|
|Foods|0.32-1.54|0.50-1.30|S|
|Lumber, Wood, etc.|0.14-1.55|0.10-0.60|S|
|Machinery|0.04-1.23|0.10-1.20|S|
|<br>Primary Metals sad Metallic||||
|<br>Products|0.18-1.36|0.30-1.10|3|
|Paper, Pblatic snd Rubber||||
|<br>Products|1.05-2.97|1.10-3.00|2|
|Refined Petroleum Products|0.52-0.66|00J70|3|
|Stone, Clay and Glas Products|1.03-2.17|100-2.20|2|
|<br>**Textles**|**03-0.77**|**0.40-0.80**|**1**|
19 Table 3 continued ...

|Mode|Range Surveyed|Most Likely Range|No. of Studies|
|---|---|---|---|
|**Aggregate**Commnodities|0.82-1.60|0.01.60|3|
|Shipping: Inland Waterway||||
|Aggregate Commodities|(0.74-0.76)|-|I<br>|
|Chemicals|0.75|-|1|
|Coal|0.28|-|I|
|Crude Petroleum|149|-|I|
|Grain|0.4-1.62|0.60-1.60|2|
|Lumber and Wood|0.60|-|I<br>|
|Non-Metallic Ores|0.65|-|1|
|Primary Metal|0.28|-|I|
|Pulp and Paper|1.12|-|I|
|Stone, Clay and Glass Products|1.22|-|1|
|.hlpplng: Ocean'||||
|Dry Bulk Shipment'|0.00.25|-|1|
|<br>Foods|0.20-0.31|-|1|
|Liquid Bulk Shipment|0.21|-|1|
|GeneralCargo|0.00-1.10||I 1|

- 'The high elasticity estimates may reflect a low mar et share of **aggre1ate** freight of the mode when using the translog cost function in estimation.

3There have been very few empirical studies on shipping, hence the elsticity estimates r ported here shr id be interpreted with caution.

'These include coal, grain, Iron ore and concentrates, etc.

Note: Figur in parenthes re mode choice elaticities.

Table 4: Elasticities of Demand for Gasoline

|(|All elasticity figure|s are negative)||
|---|---|---|---|
|Country<br>|Ranged Surveyed<br>|Most Likely Range|No of Studies|
|Austria|0.25-0.27||1|
|Canada<br>|0.11<br>|_1||
|Israel|0.25|_1||
|U.K.|0.1-0.17|_1||
|U.S.<br>|0.04-0.21<br>|_1||
|West Germany|0.25-0.93|_1||
|Multicountry Studies|0.20-1.37-|0.20-0.50|3|

'Included in this range is a long-run elasticity estimate of 0.32-1.37.
20 Table 5: Selected Estimates of Cross Elasticities

||(A|ggregate Data)||
|---|---|---|---|
|Authors|Modes|Cros Elasticities<br>|Remarks|
|Oum (1979a)|Ril-Truck<br>Truck-Rail<br>Rail-Waterway<br>Waterway-Rail<br>Thuck-Waterway|-0.10to +0.14<br>-0.88 to +0.13<br>+0.15 to +0.20<br>+0.61 to +0.86<br>-0.23 to +0.03|Aggregate freight transport<br>demand in Canada,**cross elas-**<br>ticities reported for selected<br>years between 190S-1974.|
||Waterway-Tuck|-0.12 to +0.13||
|Oum and|Air-Bus|.0.02 to -0.01|Aggregate intercity passenger|
|Gillen (1983)|Air-Rail|+0.01 to +0.04|transport demand in Canada,|
||Bus-Air|*0.12 to -0.05|cross elsticities reported|
||Bus-Rail|-0.47 to 40.21|for selected years between|
||Rail-Air|+0.08 to +0.51|1961-1976.|
||Raii-Bus|_-I.18_to -0.17||
|Oum (1989)|Rail-Truck'|-0.18 to +0.50|Interregional freight transport|
||Truck-Rail'|-0.62 to +0.84|demand in Canada.|
||Rail-Truck6|-0.47 to +0.48||
|||Tuck-Railb|-0.26 to +0.35||
|:Aggregate co|mmodities.|||
|'Fruits, vegeta|bles and other edibl|e foods.||
21

# References

Anderson, J.E. and H. Kraus (1981) "Quality of Service and the Demand for Air Travel,' Review of Economics and Statistics, 63(4), 533-40.

Appelbaum, Eli (1982) 'The Estimation of the Degree of Oligopoly Power," J. of Econometrics 19, pp.287-299.

Blum. U.C.H., G. Foos and M.J.I. Gaudry (1988) 'Aggregate Time Series Gasoline Demand Models: Review of the Literature and New Evidence for West Germany," Transportation Research A, 22, 75--88.

Brander, James A., and Anming Zhang, (1989) 'Market Conduct in the Airline Industry: An Empirical Investigation,* Working Paper, Faculty of Commerce and Business Administration, the University of British Columbia, Vancouver.

Friedlaender, A.F. and R.H. Spady (1980) 'A Derived Demand Function for Freight Transportation,* Review of Economics and Statistics, 62, 432--41.

Hensher, D.A. and Louviere, J.J. (1983) 'Identifying Individual Preferences for International Air Fares: An Application of Functional Measurement Theory,* Journal of Transport Economics and Policy, 17, 225--45.

HcFadden, D. (1974) 'The Measurement of Urban Travel Demand," Journal of Public Economics, 3, 303--28.

Oum, Tae H. (1979), 'A Warning on the Use of Linear Logit Models in Transport Mode Choice Studies,' Bell Journal of Economics (Spring, 1979), pp.374-388.

Oum, Tae H. (1979b), 'Derived Demand for Freight Transportation and Intermodal Competition in Canada,' Journal of Transport Economics and Policy, (May, 1979), pp.149-168.

Oum, Tae H. (1979c), 'A Cross-sectional Study of Freight Transport Demand and Rail-Truck Competition in Canada," Bell Journal of Economics, (Autumn, 1979), pp.463-482.

Oum, T.H. (1989) 'Alternative Demand Models and Their Elasticity Estimates," Journal of Transport Economics and Policy, 23, 163--87.

Quandt, R.E. (1968), 'Estimation of Modal Splits,' Transportation Research, vol.2, 41-50.

Quandt, R.E. and W.J.Baumol (1966) 'The Demand for Abstract Transportation Modes: Theory and Measurement," Journal of Regional Science (December), 13-26.

Slade, Margaret E. (1984) 'Conjectures, Firm Characteristics and Market Structure: An Analysis of Vancouver's Gasoline Price Wars,' Discussion Paper No. 84-25, Department of Economics, the University of British Columbia, Vancouver.
22 Spady. R.B., and A. Friedlasuder (1978), 'Hedonic Cost Functions for the Regulated Trucking Industry," Bell Journal of Economics, (Spring, 1978), pp. 159-79.

Taplin, J.H.E. (1982) "Inferring Ordinary Elasticities from Choice or HodeSplit Elasticities," Journal of Transport Economics and Policy, 16, 55--63.

Waters II, W.G. (1984) "A Bibliography of Articles Relevant to Transportation Appearing in Major Economics Journals: 1960--1981," Vancouver$ Centre for Transportation Studies, U.B.C.

Waters U1, W.G. (1989) 'A Bibliography of Articles Relevant to Transportation Appearing in Major Economics Journals: Update 1982--1987,' Vancouvers Centre for Transportation Studies, U.B.C.

Winston, C. (1985) 'Conceptual Developments in the Economics of Transportations An Interpretive Survey," Journal of Economic Literature, 23, 57--94.
23

# Appendix **1** List of Journals Scanned: (Not Including Journals listed in Water 1984, 1989)

Journal of the Transportation Research Forum 1980 v.21 to 1988 v.29 Logistics and Transportation Review 1981 v.17(1) to 1989 v.25(1) Reareb in Transportation Economics 1985 v.2 1983 v.1 Research in Urban Economics 1981 v.1 to 1988 v.7 Transport Policy and Decision Making 1985 1, 2, 3 1984 3, 4 1982 2 1980 1, 2/3, 4 Transport Reviews 1985 v.5(1) to 1989 v.9(2) Transportation 1981 v.10(1) to 1988 v.15(4) Trnsportation Journal 1982/83 v.22(1) to 1988/89 v.26(3) Transportation Quarterly 1985 v.39(2) to 1989 v.43(2) Transportation Research A 1980 v.14(1) to 1989 v.23(1) Transportation Research B 1980 v.14(1) to 1989 v.23(1) Transportation Research Record 1981 v.789 to 1988 v.1163 Volumes not available: 1987 v.1121-1130 1981 v. 820- 829
24

# Appendix 2 Complete List of Elasticity Estimates

|Elasticities of D|emand for Passenger Transport: A|U Studies|
|---|---|---|
|Mode|Market Demand Elasticities|Mode Choice Elasticities|
|_Air_<br>Vacation|1.11,1.52,0.4-1.68-1.98,1.48-1.92,<br>1.23-1.84-1.93-2.75-2.95-4.05,<br>1.4-1.6-2.0-2.7-3.3,<br>|0.3B|
||2.2-2.4-2.6-4.6||
|NonDracation|1.2-1.66-1 .S4-2.51-3.74-3.78-4.18,<br>0.08-0.36-0.48,1.15,0.65,0.90|0.18|
|Mixedc|0.44-1.81,0.67-0.78-0.91-1.28,|1.28-2.24-2.43-3.69-3.81-5.26,0.62,|
||0.76-0.84,1.39,0.53-1.00,1.12-1.28,<br>0.49-0.82-1.02-1.03-1.29-1.83,|0.26-0.38|
||1.85-2.09-2.91,0.7-1-1.5,2.82-4.61,<br>I.8-1.9||
|Rail|||
|Intercity|||
|Leisure|1.4|1.2|
|Business|0.7|0.57|
|Mixed"|0.11-0.14-0.34-0.48-0.6-0.62-<br>0.65-0.67-0.68-0.7-0.85-0.87-|0.32,0.86-1.14|
||1.03-1.18,0.74-0.9,0.37-0.4,||
||1.08-1.54,1.19-1.5,0.16-0.3||
|Intracity|||
|Peak|0.15|0.22-0.25|
|Ofr Peak|1.0||
|All Day-|0.12-0.23-0.44-0.49,1.8,0.3|0.08-0.29-0.44-0.57-0.75|
|<br>Automobile|||
|Peak|0.21-0.36,0.12-0.49|0.02-0.04-0.08-0.14-0.16-0.31-<br>0.550.88,0.16,0.04,0.7,0.16-0.18,<br>0.15-0.46-' 59-1.16-2.03-2.69,<br>0.32-0.47,|
|**Off**Peak|0.14-0.29,0.88,0.15-0.45,0.06-0.09,|0.16-0.34-0.79-0.96,0.96|
|All Day'|0.0-0.09-0.22-0.52,0.06-0.1-0.23-|0.12-0.26-0.38-0.62-0.97-1.26,|
||0.28,0.05-0.09-0.1-0.22-0.26-0.31|0.01-0.02,0.08,0.83|
25

|Peak|0.0|0.04,0.03,0.32,0.06.0.45-0.58|
|---|---|---|
|Off Peak|1.06-1.54|0.01,0.69|
|All Day'|0.1-O.6,0.37-0.42-0.56,0.4-0.48-<br>G.75,0.26-0.52-0.78,0.20-0.4-0.66,<br>0.23-0.27,1.27-1.62|0.03-0.14,0.31-0A -0.58-0.7,0.32,<br>0.45-0.6|
|RapidTransit|||
|All Day|0.05,0.23-0.25,0.16-0.3,0.16.0.86,0.86||
|Transit System|||
|Peak|0.11-0.13-0.19-0.24-0.26-0.29,0.0,<br>0.1|0.1|
|Off Peak|0.36-0.39-0.41-0.44-0.49,1.0,0.32||
|All Day'|0.13-0.29-0.34-0.42,0.01-0.04-<br>0.15-0.26-0.28-0.38-0.62,0.33,0.7,<br>0.34-0.4-0.54,0.18-0.19-0.22-0.43<br>-<br>0.52,0.05-0.19-0.34,0.17-0.59,<br>0.4-0.8,0.09-.1 1-0.19-.4-0.96||
|Others|||
|Minibus<br>Aircraft Landing|0.08-0.58|0.1|
|'Including studies<br>Note: Elasticity ra<br>separate estimates|that do not make the classification.<br>nges reported in the same study are join<br>from different studies.|ed by dashes, and commas|
26 Elasticities of Demand for Freight Transport: All Studies _Mode_ Demand Elasleitiec Aegafte Commodites 0.-04.831 . 20.29), * ~~~~~(0.34'-0.3?-0.59-C.93-.03-1.0-.79). (0.250.2S) **Appael** Products (0.22) Asiembled Automobiles 0.92-1.08,0.65 Checals 0.39,0.69,2.25,(0.66) Coal 0.02,0.14-3.04 Coom, Wheat, etc. 0.52-0.3,1.18,1.11 Fertillsers 0.02-1.04 Foods 1.23,1.04,0.39-0.48-O.B,0.02-0.27,0.29,2 U,(l.0) Fuel Oil (except gaoline) 0.46 Furniture Products (1.3) Lumber, Pulp, Pape, etc. 050.56,0.05,036-0.67,0.58,1.97,0.08,(0.?6-.87) Machinery (ucludlng Electrical Machinery) 2.27-3.55,0.61,(0.16-1.73) Meat 0.02-0.27,2.58 Nonmetallic Products 1.08 Paper, Plasc and Rubber Ptoduets 1.85,1.03,0.17 Paper, Printing and Publshing 0.17 Prhnmry Metalb and Metic Products 1.03,12,2.16-2.54,0.02,(1.67) Refined Petroleum Products 0.99,0.53 Stone, Clay and Gls Products 1.68,0.82,(0.69) lattiles 0.r6,(2.03) bbamcco Products (0.89) 1kanport Equipment 2.68
27

|Agregate Commodities|0.06-0.69-0.93-1.14-1.34|
|---|---|
|Asembled Automobiles|0.S2-0.67|
|Chemical<br>|0.98,1.87-2.31|
|Corn, Wheat, etc.|0.73,0.99|
|Foods|0.52,0.32-0.66-0.97-1.25-1.54,1.0|
|Fuel OiH (except gasolne)|1.07|
|Lumber, Wood, etc.|0.56,1.65,0.14|
|Machinery (including Electrical Machinery)|1.09-1.23,0.04-0.78|
|Primary Metals and Metabic Products|0.41,1.08-1.36,0.18-0.28|
|Nonmetallic Products|0.56|
|Paper, Plastie and Rubber Products|1.05,2.01-2,97|
|Refined Petroleum Products|0.82,0.66|
|Stone, Clay, and Gla Products|1.03,2.04-2.17|
|Textiles|0.43-0.77|
|TransportEquipment|0.29|
|Shipping||
|Inland Waterway||
|Aggregate|(0.74-0.7S)|
|Chemncals|0.75|
|Coal|0.28|
|Crude Petroleum|1.49|
|Grain|1.48-1.62,0.64|
|Lumber and Wood|0.6|
|Non-Metallic Ores|0.55|
|Primary Metal|0.28|
|Pulp and Paper|1.12|
|Stone, Clay and Gla Products|1.22|
|Ocean||
|Coal|0.06-0.24|
|Foods|0.2-0.31|
|General Cargo|0-0.5-1.1|
|Grain|0.02-0.06-0.27-1.64|
|Iroi Ore and Concentrates|0.11|
|Liquid Bulk Shipment|0.21|
|<br>Wool|0.02|
|Air||
|Aggregate|1.32,1.47-1.60,0.82-1.03|

Note: Figures in parentheses are mode choice elasticities.
28 Elasticities of Demand for Gasoline: All Studies

|Country|Market Demand Elasticity|
|---|---|
|Austria|0.25-0.27|
|Canada|0.11|
|Israel|0.25|
|U.K.|0.1-0.17|
|U.S.|0.04-0.21|
|West Germany|0.25-0.93|
|Multicountry Studies|0.27-0.52,0.2-0.3,0.32-1.37<br>'|
|Note: 'Long-run elasticities.||