Economies of Scale, Networks, and Network Cost Elasticity

A foundation for examining network economy of scale effects is presented. A natural measure of the network scale effect is the network cost elasticity e, defined as the ratio of the fractional decrease in network average cost per circuit mile to the fractional increase in total circuit miles carried by the network. The maximum scale effect is given by e = 1 while e = 0 signifies no scale effect. The value of e can be estimated by comparing two network plans, one with nominal circuit demands and one with small variations in the demands. For a static network model, e can vary from 0 to 0.75 for several possible ways of changing each point-to-point circuit demand. The complex point-to-point nature of network demand must be included in any meaningful study of network scale effects. A simple example is used to show that static studies, while providing useful insight, have little relevance to issues concerned with a communications network evolving over time. A dynamic model of network evolution is presented which includes the point-to-point nature of demand and the sequential nature of facility installation decisions. A low-cost plan is developed for a nominal and slightly modified demand forecast. The transmission facilities assumed available are the same for both plans. However, advances in transmission technology during the study interval must be allowed in both plans if the results are to have relevance.