Jean-Paul Rodrigue (2013), New York:
Routledge, 416 pages.
Transport Supply and Demand
Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom
1. The Supply and Demand for Transportation
Each transport more shares the common goal of fulfilling
transport demand, and each transport mode thus fills
the purpose of supporting mobility. Transportation
is a service that must be utilized immediately since unlike
the resources it often carries, the transport service itself
cannot be stored. Mobility must occur over transport infrastructures
having a fixed capacity, providing a transport supply.
In several instances, transport demand is answered in the
simplest means possible, notably by walking. However, in
some cases elaborate and expensive infrastructures and modes
are required to provide mobility, such as for international
Transportation is a market composed of suppliers of transport
services and users of these services. Well-functioning transport
markets should allow transport supply to meet transport
demand so that transport needs for mobility are satisfied.
An economic system including numerous activities located
in different areas generates movements that must be supported
by the transport system. Without movements infrastructures
would be useless and without infrastructures movements could
not occur, or would not occur in a cost efficient manner.
This interdependency can be considered
according to two concepts, which are transport
supply and demand:
Transport supply. The capacity of transportation
infrastructures and modes, generally over a geographically
defined transport system and for a specific period of time.
Supply is expressed in terms of infrastructures (capacity),
services (frequency) and networks (coverage). Capacity is
often assessed in static
and dynamic terms where static capacity represents
the amount of space available for transport (e.g.
terminal surface) and dynamic capacity are the
improvement that can be made through better technology
and management. The number of passengers, volume
(for liquids or containerized traffic), or mass (for freight)
that can be transported per unit of time and space is commonly
used to quantify transport supply.
Transport demand. Transport needs, even if those
needs are satisfied, fully, partially or not at all.
Similar to transport supply, it is expressed in terms of
number of people, volume, or tons per unit of time and
The supply side of the transport market can be divided into
Transport demand is generated by the economy, which is
composed persons, institutions and industries and which
generates movements of people and freight.
A distinction can be made between consumptive
and productive transport needs. Productive
transport needs have a clear economic focus. For example,
the transport of semi-finished products from one production
site to the final production or assembly site creates added
value in the production process by benefiting from the locational
advantages of each of the production sites. Consumptive
transport needs generate less visible added value. For example,
a road trip does not really add value in a pure economic
sense, but generates subjective utility and satisfaction
to the users. A discussion on the functioning of transport
markets is particularly relevant where it concerns the fulfillment
of productive transport needs, but the consumptive dimension
of transport must also be considered.
The location of resources, factories, distribution centers
and markets is obviously related to freight movements. Transport
demand can vary under two
circumstances that are often concomitant; the quantity
of passengers or freight increases or the distance over
which these passengers or freight are carried increases.
Geographical considerations and transport costs account
for significant variations in the
composition of freight transport
demand between countries. For the movements of passengers,
the location of residential, commercial and industrial areas
tells a lot about the generation and attraction of movements.
2. Supply and Demand Functions
Transport supply and demand have a reciprocal but
asymmetric relation. While a realized transport
demand cannot take place without a corresponding level of
transport supply, a transport supply can exist without a
corresponding transport demand. This is common in infrastructure
projects that are designed with a capacity fulfilling an
expected demand level, which may or may not materialize,
or may take several years to do so. Scheduled transport
services, such a public transit or airlines, are offering
a transport supply that runs even if the demand is insufficient.
Infrastructures also tend to be designed at a capacity level
higher than the expected base scenario in case that demand
turns out to be is higher than anticipated. In other cases,
the demand does not materialize, often due to improper planning
or unexpected socioeconomic changes.
Transport demand that is met by a supply of transport services
generates traffic (trucks, trains, ships, airplanes, buses,
bicycles, etc.) on the corresponding transport infrastructure
networks. The traffic capacity is generally larger than
the actual transport demand since the average utilization
degree of vehicles rarely reaches 100 percent: e.g. empty
hauls of trucks, an underutilized container ship capacity
sailing on a shipping route characterized by imbalanced
container flows, an underutilized off-peak bus service and
the one person per car situation in commuter traffic.
There is a simple statistical way to measure transport supply
and demand for passengers or freight:
- Third-party transportation. Transport
companies offer transport services to users who require
such services, often on open markets. Transport users
pay for the services delivered according to the terms of the
agreed contract. Examples include third-party trucking
companies, container shipping lines, railway operators
and bus companies. Competitiveness is a key advantage
of third-party transportation as providers strive to
offer better and lower cost services for their customers.
There is also the risk of fluctuating prices due to
changing market conditions and that transport capacity
may not be available when a customer requires it.
- Own account transportation. The
transport user deploys his own transport means to move
freight or to travel (e.g. motorists using private cars
or large industrial companies owning a fleet of trucks
or rail wagons). The transport user has a direct access
to a known capacity, but at the risk of a lower level
of asset utilization (e.g. empty movements or idle
The passenger-km (or passenger-mile) is a common
measure expressing the realized
passenger transport demand as it compares a transported
quantity of passengers with a distance over which it gets
carried. The ton-km (or ton-mile) is a common measure
expressing the realized
freight transport demand. Although both the passenger-km
and ton-km are most commonly used to measure realized demand,
the measure can equally apply for transport supply.
For instance, the transport supply of a Boeing 747-400 flight
between New York and London would be 426 passengers (if
a Boeing 747-400 with optimal seating configuration is used)
over 5,500 kilometers (with a transit time of about 6 hours
depending on the direction). This implies a transport supply
of 2,343,000 passenger-kms. In reality, there could be a
demand of 450 passengers for that flight, or of 2,465,000
passenger-km, even if the actual capacity would be of only
426 passengers. In this case the realized demand
would be 426 passengers over 5,500 kilometers out of a
potential demand of 450 passengers, implying a system
where demand is at 105% of capacity.
There are several factors impacting the capacity of transport
infrastructure, from the physical characteristics of the
network, how it is operated and maintained to the presence
bottlenecks. Transport supply can be simplified by a
set of functions representing what are the
main variables influencing
the capacity of transport systems. These variables are
different for each mode. For road, rail and telecommunications,
transport supply is often dependent on the capacity of
the routes and vehicles (modal supply) while for air
and maritime transportation transport supply is strongly
influenced by the capacity of the terminals (intermodal
Transport demand tends to be expressed at specific times
that are related to economic and social activity patterns.
In many cases, transport demand is stable and recurrent,
which allows a good approximation in planning services.
In other cases, transport demand is unstable and uncertain,
which makes it difficult to offer an adequate level of service.
For instance, commuting is a recurring and predictable pattern
of movements, while emergency response vehicles such as
ambulances are dealing with an unpredictable demand that
can be expressed as a probability. Transport demand functions
vary according to the nature of what is to be transported:
- Modal supply. The
supply of one mode influences the supply of others,
such for roads where different modes compete for the same
infrastructure, especially in congested areas. For instance,
transport supply for cars and trucks is inversely proportional
since they share the same road infrastructure.
- Intermodal supply. Transport supply is also dependent
of the transshipment capacity
of intermodal infrastructures. For instance, the maximum
number flights per day between New York and Chicago cannot
be superior to the daily capacity of the airports of New
and Chicago, even though the New York - Chicago air corridor
has potentially a very high capacity.
3. Supply / Demand Relationships
Relationships between transport supply and demand continually
change, but they are mutually interrelated. From a conventional
economic perspective, transport
supply and demand interact until an equilibrium is reached
between the quantity of transportation the market is willing
to use at a given price and the quantity being supplied
for that price level. Price changes not only affect the
level of transport demand, but can also lead to shifts
of demand to other routes, alternative transport modes
and or other time periods. In the medium or long term
structural changes in the pricing of transport can
affect location decisions of individuals and businesses. However, several considerations are
specific to the transport sector which make supply / demand
relationships more complex:
- Passengers. For the road and air transport of
passengers, demand is a function of demographic attributes
of the population such as income, age, standard of living,
race and sex, as well as modal preferences.
- Freight. For freight transportation, the demand
is function of the nature and the importance of economic
activities (GDP, commercial surface, number of tons of ore
extracted, etc.) and of modal preferences. Freight transportation
demand is more complex to evaluate than passengers.
- Information. For telecommunications, the demand
can be a function of several criteria including the population
(telephone calls) and the volume of financial activities
(stock exchange). The standard of living and education levels
are also factors to be considered.
The price elasticity of transport demand can influence the
strategic behavior of economic actors. For instance, container shipping lines are faced
with a highly inelastic demand due to the combined effect
of a lack of close substitutes (i.e. the only alternative
transport mode in the intercontinental transport of high
value goods is air freight, but this market segment has
a much lower cargo carrying capacity and prices are much
higher) and the small impact of freight rates on total costs.
For most shipments the total freight price only accounts
for a very small portion of the shipment’s total value;
usually less than 5 percent. As container lines cannot influence
the size of the final market, they try to increase their
short run market share by reducing prices. As such, shipping
lines may reduce freight rates without substantially affecting
the underlying demand for container freight. The only additional
demand can come from low value products which will only
be shipped overseas if freight rates are very low (e.g.
the market for waste paper and metal scrap). These 'temporary'
markets disappear again once the freight rate is above a
threshold level no longer allowing a profit on trading these
products overseas. The fairly inelastic nature of demand
for shipping services constitutes the core problem for the
poor financial performance of container shipping lines.
Shipping lines have developed an intense concentration on
costs and on negotiated long-term contracts with large shippers
in view of securing cargo.
As transport demand is a
demand from individuals, groups and industries it
can be desegregated into series of partial demands fulfilled
by the adaptation and evolution of transport techniques,
vehicles and infrastructures to changing needs. Moreover,
the growing complexity of economies and societies linked
with technological changes force the transport industry
to constant changes. This leads to growing congestion,
a reduction in transport safety, a degradation of transport
infrastructures and concerns about environmental impacts.
4. Transportation Yield Management
Transport demand tends to be
variable in time and space
whereas transport supply is fixed. When demand is
lower than supply, transit times are stable and predictable,
since the infrastructures are able to support their
load. When transport demand exceeds supply for a period
in time, there is congestion with significant increases
in transit times and higher levels of unpredictability.
A growth of the transport demand increases the load
factor of a transport network until transport supply
is reached. Speed and transit times drop afterwards.
The same journey can thus have different durations according
to the time of the day.
Conventionally, congestion tended to have limited impacts
on the fare structure as many transport operators were
state owned or highly regulated. With deregulation,
transport companies were able to establish a level of
service reflecting market forces, as well as being able
to expand, or rationalize, their capacity. Subsidies
were removed, implying that the fare structure would
be the dominant source of income to provide for operating
and capital costs of the transport service. A common
issue is that while the transport supply is relatively
well known, often a scheduled service, the transport
demand remains predictable, but subject to volatility.
Many transport providers, particularly airline companies,
have responded to the complexity of predicting transport
demand with yield management approaches.
- Entry costs. These are the costs incurred to
operate at least one vehicle in a transport system. In
some sectors, notably maritime, rail and air
transportation, entry costs are very high, while in
others such as trucking, they are very low. High entry
costs imply that transport companies will consider
seriously the additional demand before adding new
capacity or new infrastructures (or venturing in a new
service). In a situation of low entry costs the number
of companies is fluctuating
with the demand. When entry costs are high, the emergence
of a new player is uncommon while dropping out is often
a dramatic event linked to a large bankruptcy. Consequently,
transport activities with high entry costs tend to be oligopolistic
while transport activities with low entry costs tend to
have many competitors.
- Public sector. Few other sectors of the economy
have seen such a high level of public involvement than transportation,
which creates many disruptions in conventional price mechanisms.
The provision of transport infrastructures, especially roads,
was massively funded by governments, namely for the sake
of national accessibility and regional equity. Transit systems
are also heavily subsidized to provide accessibility
to urban populations and more specifically to the poorest
segment judged to be deprived in mobility. As a consequence,
transport costs are often considered as partially subsidized.
Government control (and direct ownership) was also significant
for several modes, such as rail and air transportation in
a number of countries. The recent years have however been
characterized by privatization and deregulation.
- Elasticity. The
notion of price elasticity is at the core of transport demand
and refers to the variation of demand in response to a variation
of cost. For example, an elasticity of -0.5 for vehicle
use with respect to vehicle operating costs means that an
increase of 1% in operating costs would imply a 0.5% reduction
in vehicle mileage or trips. Variations of transport costs
have different consequences for different modes, but transport
demand has a tendency to be inelastic. While commuting tends
to be inelastic in terms of costs, it is elastic in terms
of time. For economic sectors where freight costs are a
small component of the total production costs, variations
in transport costs have limited consequences on the demand.
For air transportation, especially the tourism sector, price
variations have significant impacts on the demand. There
are thus differences among the obtained price elasticities, which raises questions about the transferability
of the results to other locations and or other time periods.
Hence, each case is characterized by a specific local environment
in terms of modal choice options, budget/income of the transport
user, spatial planning, price levels, etc. All these factors
combined can make the behavior of transport users somewhat
different across regions and settings.
Transportation yield management
is the process of managing the usage price of a
transport asset, such as the fare paid by users,
in view of continuous changes in the demand. The
goal of such an approach is to maximize profit in
the context where the transport supply is fixed.
- A fixed transport capacity implying
that transport demand is the only function that can
effectively vary. For instance, the capacity of a scheduled
flight or of a containership is fixed (known value)
and cannot be readily changed without serious impacts
on the quality of service.
- Unused transport capacity loses all of its
utility, implying that transport suppliers
cannot store for another time the services that have
not been used. Once an aircraft or a ship has departed,
its transport capacity is lost for the concerned airport
or port. Any unused capacity is therefore a loss of
- Transport users are willing to pay different
rates for the same capacity or service, implying
that they value transportation differently based upon
their priorities and time preferences. For instance,
a business traveller needing to attend a meeting values
differently the same airplane seat than a tourist would.
The former would be willing to pay a high price to secure
a seat on a specific flight while the later tends to
seek discounted values and would be unwilling to bid
above a certain price threshold. Also, time dependent
users of cargo services (e.g. electronics) are willing
to pay more for the same capacity than those who are
less time dependent.