Transportation and Telecommunications Cost

8/4/2019 Transportation and Telecommunications Cost

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Ann Reg Sc i (1991) 25:19-39 - - T h e A n na ls o f - -Regi0nalScience Springer-Verlag 1991

Transportation and telecommunications costsS o m e i m p l i c a t i o n s o f g e o g r a p h i c a l s c a l eI lan S alom on 1 and Joseph Schofer 2I Department of Geography, The Hebrew Universi ty, Mount Scopus, Jerusalem, 91905 Israel2 The Transporta t ion Center a nd Depar tm ent o f Civi l Engineer ing, Northweste rn Universi ty ,Evanston, IL 60208, USAReceived September 1989 / Accepted in revised form June 1990

Abstract. The decreasing costs of telecommunications and the often increasingcosts of transportation have given rise to claims that information-intensive ac-tivities are becoming footloose. One of the assumptions underlying these claimsis that the cost of distance in telecommunications is negligible or very low. Thispaper examines the relationship between distance and interaction (telecom-munications and transportation) costs and rates, with particular emphasis on theeffects of geographical scale. Focusing on data from Israel, it demonstrates thatthe costs of distance are persistent even in telecommunications systems; that forshort distances or small regions, transportation costs are not necessarily higherthan telecommunications costs; and that pricing of telecommunicat ions servicesby governments (or PTT's) often does not reflect the costs of providing the ser-vices. This creates a cost distribution which differs from Euclidean geographicaldistances: discontinuities in the rate structure of telecommunications distort thedistance-cost schedules and, by creating barriers, may affect location decisions.

The paper also demonstrates that actual interaction costs are context specificand therefore no general model has been formulated. Instead, an accounting pro-cedure, which can be used by decision-makers considering (re)location in specificcontexts, is suggested.

1. IntroductionEconomic activities depend on interactions among agents for their normal opera-tion. The costs of interactions have been identified as important factors inclassical location theory, and the transport costs of materials, final products andlabor underlie many location models. In recent years, with the growing impor-tance of information resources as major inputs and outputs o f economic ac-tivities, attention is shifting to the special case of "transporting" information(e.g., Pye 1977; Goddard 1973; Kutay 1986; Johansen 1987; Dieperink and Nij-kamp 1987).


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20 I. Salomon and J. SchoferMeans for transporting information have been significantly enhanced in re-cent years with the advent of New Informat ion Technologies (NIT). These includea variety of microelectronic-based technologies and applications which combine

telecommunications and computers to accommodate information processing,transmission and storage across distant locations.Spatial interactions are maintained through a variety of communicationmodes, some of which are NIT-based while others are travel-based and require theco-location of the participants. In this paper we deal with the distinction betweenthese two modes.The shift toward an information-intensive economy, coupled with the veryrapid development of NIT, has given rise to a number of hypotheses about thespatial impact of these changes. One popular claim is that telecommunicationswill relax many of the current locational constraints, making activities morefootloose, and thereby bringing about a decentralizat ion of activities, an exodusfrom dense urban centers to the periphery. Alternatively, it has been suggestedthat NIT will bring about a restructuring of the spatial pattern of activities, notnecessarily in the outward direction. With the in troduction of another dimensionof flexibility, firms can take advantage of telecommunications to entertain otherlocation economies. Firms may be able, for example, to disperse some of their ac-tivities to peripheral locations, while reconcentrating others to headquarters incentral cities where agglomeration economies still outweigh the economies offeredin remote locations, without losing control over the remote activities.Each o f these conflicting views is based on numerous assumptions which havenot received much attention to date compared with the attention paid to policypreferences for achieving certain impacts. For example, the decentralization hy-pothesis is quite attractive to policy makers interested in promoting developmentin hinterlands to replicate the economic success experienced in other areas (see,for example, Saxenian 1985). Other policy makers, concerned about avoiding con-gestion in infrastructure-poor areas, may focus on opportunities for agglomera-tion.At present, empirical evidence of these spatial impacts is hard to find. Thismay be attributed to the fact that many of these technological developments arevery recent, many confounding factors are acting simultaneously, and method-ologicalty, it is difficult to ident ify the causal relationship between investments inNIT and development impacts (Wellenius 1984; Hudson 1984). Research effortshave thus focused on theoretical arguments and limited empirical studies whichattempt to identi fy specific relationships.It is almost uniformly assumed that the costs (to the user) of overcoming dis-tance in telecommunicat ions are lower than the costs o f travel-based communica-tions. Thus, for information-intensive activities, telecommunications could relaxdistance-related constraints. This paper focuses on this particular assumptionthat is embedded in the hypotheses about the spatial impacts of NIT.Recently, there has been growing interest in the role of barriers to communica-tions and transportation, as it has been realized that distance alone, albeit a bar-rier, cannot account for many directional variations in interaction densities. Ofcourse, the abil ity to construct or remove such barriers has come into theforeground in the context of "One Europe". The findings of the present effort are


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Transportation and telecommunication costs 21of relevance to the s tudy of barr iers , as a t tent ion is paid to the effect of d iscon-t inui t ies in rate s t ructure as wel l as in o ther spat ia l cos t factors .

The common assumpt ions used to suppor t the use o f t e lecommunica t ions asa spat ia l pol icy tool are brief ly described in Sect . 2. Se ct ion 3 presents the hypoth e-ses of th is s tudy, fo l lowed in Sect. 4 by a d iscuss ion o n the cost schedules of thetwo modes o f in te rac t ion cons idered here : t e lecommunica t ions and t ranspor ta t ion .Sect ion 5 presents some empirical f indings from Israel , fo l lowed by Sect . 6 whichdiscusses the implicat ions of these f indings . Sect ion 7 presents some conclus ions .

2. NIT and developmentTh e h y p o t h es i s t h a t N IT can fo s te r e co n o m i c d ev e l o p m en t is b a s ed o n t w o m a j o rargumen ts . First, i t is assumed that the availability of information will increasethe produ ctivity o f activities located in peripheral regions. For example , fa rmersin underdeve loped ru ra l a reas wi ll be ab le to ob ta in in fo rm at io n on im proved p ro -duct ion technologies , such as the use of pes t ic ides or fer t i l izers and hence wil l in-c rease c rop p ro duc t ion . S imila rly , access to t imely marke t i n fo r ma t ion wi l l enab lebet ter schedul ing of sh ipments to the market , thus increas ing crop revenues . I t i sno t obv ious , however, tha t such in fo rma t ion i s bes t channe l led th ro ugh NI T (Dar-row and Saxenian 1985). I t may, for example, be more eff ic ient to d isseminate i tth rough mass med ia (Massam 1989) .

T h e second argument is that NIT wil l encourage information-intensive ac-tivities to locate in periph eral regions, an d thro ugh their multiplier effectsrepl icate the econom ic bo om experienced elsewhere (e.g., in Silicon Valley, Route128 in Massachuset ts , e tc . ) . This wil l happen, i t i s presumed, as managers makelong te rm cho ices abou t loca t ing and re loca t ing , based in par t on the i r expec ta -t i o n s ab o u t p a t t e rn s an d co s t s o f co m m u n i ca t i o n s . To t h e ex t en t t h a t N IT ad -vances a t t rac t new f i rms , these wi l l a t t rac t sk i l l ed and educa ted popu la t iongroups , who may genera te g rea te r demand fo r se rv ices and amen i t i es , thus p ro -duc ing the mul t ip l i e r e f fect s . Of-course , ma ny o the r fac to rs opera te to de te rm inethe ab i l i ty and wi l l ingness o f l abor to mig ra te to remote a reas .

The loca t iona l pa t te rns and econ omic impac ts o f h igh - tech indus t r i es have , inrecen t years , received the at t ent i on o f both researchers (M alecki 1985; Die perin kand Nijkamp 1987; Felsenstein 1985; Scot t and Stroper 1987) and pol icy makers .Po l icy makers som et imes over look the as sumpt ions emb od ied in the ana lyses andfai l to ide nt i fy the causal r e lat ionsh ip w hich evolved in to success in some placesand fa i lu re in o thers . Three assumpt ions common in these a rgumen ts a re b r ie f lyp resen ted here:

/ ) Firs t , that for information-in tensive act iv i t ies and h igh-tech industr ies , in-fo rm a t i o n is t h e o n l y i m p o r t an t - o r t h e p r i n ci p a l - i n p u t an d o u t p u t . H en ce ,access to qua l i ty t e lecommunica t ions can subs t i tu te fo r access to t ranspor ta t ionfac i l i t i es . Th is as sumpt ion t rea t s a l l h igh - techno logy and in fo rmat ion - in tens iveac t iv i ti es as hav ing s imi la r needs , wh ich i s a co m mo n m is take in the l i t e ra tu re andeven more so in the pol icy process .

In fo rmat ion - in tens ive ac t iv i t i es can be c las s i f i ed in to th ree g roups wh ich ex -h ib i t d i f fe ren t deg rees o f dependence o f loca t ion on in te rac t ion techno log ies .


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22 I. Salomonand J. SchoferHigh-tech manufacturing industries have a significant freight movement require-ment (Mahmassani and Toft 1985; Button 1988); since it is the product, ratherthan the process, that is knowledge intensive, such firms may be quite dependenton good transportation connections.The locational constraints of activities which are "pure" information pro-cessors depend on the nature of the information they demand. Thus, a secondtype of information-intensive activity includes "manual" information processingunits, such as bank and credit-card clearinghouses. These often locate wheretelecommunications access is good, and inexpensive, and where some other ad-vantage is available, e.g., a large supply of reliable, low-cost labor. Of coursefinancial clearinghouse activities still'ultimately depend on paper transactions.Thus, while funds may be transferred electronically, the physical movement ofchecks and bills underlies the entire process. This movement is typically ac-complished by mail, truck, and (in the United States) by air cargo.The third type of information-intensive activities entails primarily less-struc-tured interchange, and includes universities, research and development organiza-tions, and some office activities (see Pye 1977). In these, there is a greaterdependency on the ability to meet professionals from within and outside the orga-nization, thus their location is less influenced by the introduction of NIT, andmore so by the needs and desires of their critical resource, skilled people.

Note that each of these types is very different in the quality of the labor forceit employs and the transport network services required; thus, interaction costs, in-frastructure requirements and the multiplier effects may be quite distinct.ii) Second, it is often implicitly assumed tha t telecommunications infrastruc-ture and services are universally available. While this is technologically possible,

economic and political considerations, including the low demand (and revenues)in peripheral regions, have resulted in spatial inequalities in the distribution oftelecommunications in both developed and less developed countries (Henckel1988; Clapp and Richardson 1984; Salomon 1988). The availability of NIT inremote areas is, of course, a necessary condition for any policy aimed at its utiliza-tion for development. For interaction to take place, there are minimum re-quirements as to the availability and quality of each candidate mode.

iii) The third assumption is that telecommunications-based interactions cansubstitute for travel-based (face-to-face) interactions. This is based on the beliefthat reductions in telecommunications costs are sufficient conditions for thesubstitution (see for example, Webber 1984). It ignores the fact that there are basicdifferences in the nature of the information that can be transmitted by each ofthese modes. Substitutability depends on contextual factors such as purpose,familiarity between parties and a host of other factors (Salomon 1986; Salomonand Schofer 1988; Moore and Jovanis 1988). Only when the informationalbenefits expected from an exchange through a particular medium will not renderone mode to be dominan t will costs become a major factor in the choice betweentelecommunications and travel. In other words, when the two modes supply acommunications quality which is comparable, then costs become a major con-sideration. This theory will be elaborated below.The following discussion assumes that cost considerations are an importantdecision factor in the choice between telecommunications and travel. This means


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Transportation and telecomm unicationcosts 23t h a t t h e i n t e r a c ti n g p a r ti e s d o n o t g a i n a n y m a r g i n a l i n f o r m a t i o n a l b e n e f i t s f r o mt h e f a c t t h a t t h e y c a n i n t e r a c t f a c e - to - f a c e . I t is i m p o r t a n t t o r e c o g n i z e t h a t t h iss i t u a ti o n m a y not b e t y p i c a l; t h a t i s, o n e o f th e c o m p e t i n g m o d e s m a y h a v e s ig n i f-i c a n t n o n - c o s t a d v a n t a g e s . O f t e n , t h a t m o d e w i l l b e t r a n s p o r t a t i o n .A r g u m e n t s i n t h e li t e ra t u r e d o n o t a d d r e s s t h e p o s s i b i l it y th a t t h e s p a t ia l i m -p a c t s o f N I T d i f f e r a c c o r d i n g t o g e o g r a p h i c s c a le . Ye t, t h e c o n s e q u e n c e s o f r e l a x a -t i o n o f d i s t a n c e - r e l a t e d c o n s t r a i n t s a r e li k e l y t o d i f f e r b e t w e e n r e g i o n s t h e s i z e o fA u s t r a l i a a n d t h o s e t h e s iz e o f I s r a e l o r th e N e t h e r l a n d s . T h i s i s a n i s s u e w h i c hw a r r a n t s a t t e n t i o n f r o m g e o g r a p h e r s a n d r e g i o n a l sc ie n ti st s; i t is t h e f o c u s o f o u rm a i n h y p o t h e s i s .3 . H y p o t h e s e sT h e m a j o r h y p o t h e s is s u g g es te d i n th i s p a p e r i s t h a t t h e i m p a c t s o f t h e c h a n g i n gt e l e c o m m u n i c a t i o n s e n v i r o n m e n t a r e d i f f e r e n t i n s m a l l g e o g r a p h i c a l u n i t s t h a n i nl a r g e r o n e s . B e c a u s e t e l e c o m m u n i c a t i o n s a n d t r a n s p o r t a t i o n c o s t s c h e d u l e s e x -h i b i t d i f f e r e n t se n s i ti v i ti e s t o d i s t a n c e a n d a r e c h a r a c t e r i z e d b y d i s c o n t i n u i t i e s , t h ei m p l i c a t i o n s o f t h e c o s t r a t io s b e t w e e n t h e s e m o d e s i n s m a l l g e o g r a p h i c a l u n i t sm a y b e d i f f e r e n t f r o m t h o s e p r e v a i l i n g i n l a r g e r o n e s .

T h e t e r m " s m a l l " r e fe r s t o g e o g r a p h i c a l u n i t s w h i c h a r e u p t o a f ew h u n d r e dk i l o m e t e r s in r a d iu s . T h e y m a y b e c o u n t r i e s , o r r e g i o n s w i t h in a c o u n t r y . I n s u c ha r e a s , a r o u n d t r i p f r o m t h e p e r i p h e r y t o t h e c e n t e r ( o r v i c e v e r s a ), a l lo w i n g s u f f i -c i e n t ti m e t o c o n d u c t b u s i n e s s, c a n b e a c c o m p l i s h e d w i t h i n a s in g le d a y. W e a v o i da s t r i c t d e f i n i t i o n o f s i z e a s i t m a y v a r y d u e t o p a r t i c u l a r c i r c u m s t a n c e s o f t h es h a p e o f t h e r e g i o n o r t h e t r a n s p o r t a t i o n i n f r a s t r u c t u r e a n d s e r v i c e s a v a i l a b l e .

I t i s g e n e r a l l y a c c e p t e d t h a t t h e c o s t s o f i n t e r a c t i o n v i a t e l e c o m m u n i c a t i o n sa r e l o w e r t h a n t h e c o s t s o f t r a v e l - b a s e d , f a c e - t o - f a c e i n t e r a c t i o n s , l a r g e l y b e c a u s et e l e c o m m u n i c a t i o n s c o s t s a r e l e s s s e n s i t i v e t o d i s t a n c e , a n d n o t i m e i s l o s t f o rt ra v e l. T h e h y p o t h e s i s p r e s e n t e d h e r e is t h a t t h is a d v a n t a g e o f t e l e c o m m u n i c a t i o ni s o f l e s s e r i m p o r t a n c e i n s m a l l u n i t s t h a n i t i s i n l a r g e o n e s . C o n s e q u e n t l y ,t e l e c o m m u n i c a t i o n s c o s ts m a y h a v e a s m a l l e r e f fe c t o n t h e s p a t i a l d i s tr i b u t i o n o fe c o n o m i c a c t iv i ti e s i n s m a l l c o u n t r i e s .

S e v e r a l f a c t o r s w h i c h m a y a c t i n o p p o s i t e d i r e c t i o n s i n s m a l l a r e a s n e e d t o b ec o n s i d e r e d . F i rs t , t h e r is k o f m a k i n g t h e w r o n g l o c a t i o n d e c i s i o n , in t h e f a c e o fs m a l l c o s t d i f f e r e n t i a l s i s l o w e r i n s m a l l r e g i o n s t h a n i n l a r g e o n e s , w h e r e t h e c o s td i f f e r e n t i a l s m a y b e w i d e . T h i s l e a d s t o t h e h y p o t h e s i s t h a t i n s m a l l e r c o u n t r i e so r r e g i o n s , l o w e r r i s k e x p e c t a t i o n s m a y l e a d d e c i s i o n - m a k e r s t o a t t e m p t t oc a p i t a li z e o n o p t i o n s o p e n e d b y N I T , t h u s f a v o r in g r e l o c a ti o n . B u t , t h i s w il l o c c u ro n l y i f t h e p e r i p h e r y o f f e r s s o m e a d v a n t a g e s w h i c h a r e n o t a v a i la b l e a t t h e c e n t r a la r e as , a n d w h i c h e x c e e d t h e t r a n s a c t i o n c o s t s.

A n o t h e r f a c t o r s u p p o r t i n g d i s p e r s i o n i n s m a l l c o u n t r i e s i s t h e f a c t t h a t o u t -w a r d c o m m u t i n g , f r o m t h e b i g c i ty t o p e r i p h e r a l l o c a t io n s , m a y b e a v ia b l e o p t i o n( F e l s e n s t e i n 1 9 8 5 ). T h i s a l l o w s f i r m s t o s e t tl e th e i r i n f o r m a t i o n - i n t e n s i v e a c t i v i ti e si n l o c a t i o n s w h i c h a r e a c c e s s i b l e t o h i g h - s k i l le d l a b o r e v e n i f t h a t is n o t l o c a l . T a k -i n g a d v a n t a g e o f o t h e r l o c a t i o n a l b e n e f i t s , s u c h a s g o v e r n m e n t i n c e n t i v e s , l o wc o m m u n i c a t i o n s c o s ts , a n d t h e a v a i la b i li ty o f r e v e r s e - c o m m u t i n g l a b o r f o r c e , c a nt h u s o f f e r t h e " o p t i m a l " l o c a ti o n .


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24 I. Salom on and J. Schofer4 . The cos t s t ruc t ure o f t ranspor t a t i on and t e l ecommuni cat i ons

The cos t of t r anspor t in g mate r ia ls , goods or labor h as been ident i f ied in c lass ica lloc a t ion the o r y a s a dom ina n t f a c to r i n de t e r m in ing loc a t ion . The m or e r e c e n tide n t i f i c a t ion o f a gg lom e r a t ion e c onom ie s a l so suppor t s t he no t ion tha t t r a ns -po r t c os ts a r e dom ina n t f a c to r s , the on ly d i ff e re nc e be ing tha t t he " goo ds" c on-s ide red a re le ss tangib le : p roxim i ty to se rv ices, in form at io n sources and t ransac-t ional act ivi t ies .

The dec is ion-maker cons ider ing a ( re ) loca t ion i s thus fac ing a "cos t map"which (a t leas t conceptua l ly) ident i f ie s the to ta l cos ts of co ndu c t ing bus iness f romany poin t in a geographica l sp ace The cos t a t a g iven loca t ion i s the sum of twocomponents: the si te-specif ic local costs (e .g. , land, labor , services and thenega t ive cos ts of gov ernm ent incent ives) and the "cos ts of d is tance" , the cos ts toga in access to non- loc a l resources (e.g ., in form at ion , raw m ate r ia ls , in te rm edia tegoods, specia l ized labor , and c l ients) .

I t is use fu l to explore the impl ica t ions for the d is tance cos t map of the rapidevolu t ion of in te rac t ion technologies , both phys ica l t r anspor t and te lecom-munica t ions . To tha t end , i t i s f i r s t necessa ry to c la r i fy some of the d i f fe rencesbe tween t ranspor t and te lecommunica t ion cos ts . F rom the use r ' s pe rspec t ive , themajor dif ferences are : i ) the re la t ionship between costs and ra tes, i i ) the structureof ac tua l cos ts , ii i) the margin a l cos ts of addi t io na l ac t iv it ies , and iv) the tem pora lava i lab i l i ty of the two modes .

4.1 Costs vs. rates

To the extent tha t pr ices pa id by use rs can be sys temat ica l ly an d pu rpose fu l ly con-t ro l led , d i f fe rences be tween those pr ices and ac tua l cos ts can be u sed to in f luencemark e t response . The ava i lab i l i ty of such pr ic ing co nt ro l i s r e la ted to the degreeo f c e n t r a l i z a t ion o f sys t e m m a na ge m e n t a nd b i l l i ng .

For example , in most t r a nsp or ta t ion sys tems, users pay d i rec tly (and o f ten im-me diate l y) for cer ta in costs (e.g., fuel , fares) . They m ay pa y on ly indirect ly for in-f ras t ruc ture , pe rhaps through separa te taxes or use r fees . B i l l ing in te lecom-mu nica t io ns ten ds to be cent ra lized , a l lowing the suppl ie r grea te r f lex ib il i ty in ex-ercising pr ic ing polic ies which are based less on actual costs of providing the ser-v ice than i s the case for many t ranspor ta t ion sys tems. This fac i l i ta tes the use ofpr ic ing to achieve ce r ta in pol icy object ives a lmo st ind epen dent of t rue cos ts . Thedi f fe rent ia l t r ea tm ent o f capi ta l and opera t ing cos ts of fe rs an example. Becausethese cos ts a re incur red , pa id , and of ten f inance d in to ta l ly d i f fe rent t ime f rames ,wide d ispar it ie s be tween t rue a nd b i l led cos ts can be in t rodu ced in to the m arke t .Whi l e u l t im a te ly bo th o f t he se c os ts m us t be pa id by som e one , i n s t i t u tiona l s t ruc -tures ca n perm i t c ross- subs id ies an d d iscounts to achieve ce rta in pol icy obje tives.Whi l e f r om the na r r ow s t a ndpo in t o f e c onom ic e ff ic ie ncy , m a r g ina l c os t p r i c ingof fe r s the bes t pr ic ing scheme for use of e i the r te lecom mu nica t ion s or t r anspor ta -t ion se rv ices , a l te rna t ive economic and pol i t ica l deve lopment objec t ives of tenpreva il , leading to "d is t or ted " pr ice s t ruc tures. Such d is tor t ions seem more com-m on in c om m unic a t ions sys t e m s tha n in t r a nspor t a t ion .


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Transportation and telecommunicationcosts 254.2 Cost structuresTh e o p e ra t i n g co s ts o f b o t h t r an s p o r t a t i o n an d t e l eco m m u n i ca t i o n s a r e cha rac -te r ized by some sens it iv ity to d i s tance . In the case o f t ra nspor ta t io n , fue l, l aboran d m a i n t en an ce co st s a r e p ro p o r t i o n a l t o t h e am o u n t o f u s ag e , h en ce a re r e l a tedto d i s tance . In the case o f t e lecommunica t ions , the cos t s o f d i s tance a re no t soobv ious , and in fac t the pop u lar no t ion i s tha t there is no cos t to d i s tance a t a ll .However , long-d i s tance te lecommunica t ions requ i res more equ ipmen t ( t ransmis -s ion channe ls , repea te rs , swi tches and d i rec t l abor fo r the i r opera t ion andmain tenance) and there fo re there i s a ju s t i f i ca t ion to charge fo r d i s tance torecover the capi tal invested in the long-dis tance l ink and i ts operat ion . The sen-s i t iv i ty to d i s tance in opera t ing cos t s a lone (wi thou t cap i ta l recovery ) o f t e lecom-munica t ions i s , o f course , lower than in t ranspor ta t ion . However , because therei s a pos i t ive d i s tance cos t fo r t ranspor ta t ion , t e Iecommunica t ions p rov iders(where compet i t ion i s l imi ted ) may be inc l ined to impose s ign i f ican t d i s tancecharges because the marke t expec t s and wi l l accep t them.

Tr ans por tat io n costs are clearly sensi t ive to d is tance, as wel l as to t ime-of-day,par t i cu la r ly in conges ted a reas . Te lecomm unica t ions ra tes, on the o the r hand , a remore sens i t ive to the du ra t ion o f the in te rac t ion bu t a l so to t ime o f day (conges -t ion ) 1. Th is i s don e to ensu re e f f ic ien t u se o f the in f ras t ruc tu re . The d i f fe ren t ia lsens i t iv i ty to d i s tance and t ime be tween t ranspor t and te lecommunica t ion cos t sc rea tes s i tua t ions where the cos t advan tage o f t e lecommunica t ions may bed imin ished , as wi l l be demons t ra ted be low.

An o the r d i f fe rence a r i sing f rom the bas ic ra te s t ruc tu re o f the two mo des i sthe sens i tiv ity to the num ber o f par t i c ipan ts in an in te rac t ion . In t e leco mm unica-t ions , the m argina l cos ts of more part ic i pants a t a node is very low: a speaker-phone , mul t ip le handse t s o r a s tud io fo r t e leconferenc ing a l low mo re ind iv idua l sto t ake par t in an in te rac t ion . Connec t ing add i t iona l ind iv idua l s who a re loca tede l sewhere usua l ly involves a su rcharge beyo nd the charge fo r the add i t iona l ca ll .This surcharge is in most cases smal l . In the case of t ransport , however, themarg ina l cos ts o f ad d i t iona l pa r t i c ipan ts ma y be very h igh i f ind iv idua l va lue o ft ime , t ravel fa res and acc om mo dat i ons have to be pa id , an d lower i f par t i c ipan tsshare costs of travelling in a single vehicle.

4.3 Marginal cost of additional activitiesTh e th i rd d i f fe renc e me n t ion ed above is in the cos t s o f marg ina l ac t iv i ti es.Te lecom munica t ions have a f ixed cos t per con tac t made . Con ta c t ing a numb er o find iv idua ls a t a g iven d i s tance wou ld m ul t ip ly the cos ts . How ever , und er the t rave la l t erna t ive , the marg ina l cos t s o f con tac t ing an add i t iona l pa r ty a t the sam e loca-t ion i s smal le r than i f the con tac t i s made f rom the o r ig ina l s i t e . Consequen t ly ,in te rms o f the cos t map , one mus t examine comm unica t io ns a l t e rna t ives in t e rmsof loca t ions , t iming and marg ina l cos t s .

1 In m any cases local call rates are not tim e sensitive, although there is a general trend toward im-posing local measured service (Fu hr 1986; Levin and Cale Case t988).


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26 I . Sa lo mon and J , Schofer4.4 Tempo ral availabilityThe fourth important difference is the temporal availability or immediacy of eachmode. The availability of some transportation options is not continuous: rail andair services are offered only on a given schedule, and the inability to use them atany desired time implies additional costs to travel-based interactions that do notaffect NIT-based interactions. It is, however, difficult to quantify this cost.

4.5 Prototypical cost schedulesPrototypical transportation and telecommunications cost schedules by distanceare schematically shown in Fig. 1. Transport-based interactions costs generally in-crease monotonically with distance, up to a point where a discontinuity resultsfrom costs associated with subsistence and overnight accommodation. Discon-tinuities may also exist if the mode of transport considered has a rate structuretypical of public carriers. For example, bus, train and airline fares are commonlystructured with discontinuities with respect to distance, whereas the costs ofoperating an automobile is more typically that shown in Fig. 1. By contrast,telecommunications-based interaction costs are characterized by stepwise in-creases (Weinhaus and Oettinger 1988). The delineation of the discontinuities isdetermined by the supplier and/or the regulator.Note that the schedules shown in Fig. 1 assume the terminal (non-distance orduration-based) costs associated with the interaction to be identical. It is reason-able to assume that most trips are preceded by some coordination via telecom-munications. That cost should be added to the costs of the trip. We ignore thisand assume the equal terminal costs for simplicity, as will be discussed below.The discontinuity on the transport schedule (point A) reflects the distancebeyond which it is not expected that a business person will make a round trip inone work day. This, of course, depends on the transport technology used and onnorms prevailing in the particular country or institution. For example, wheredomestic airlines provide frequent service, the distance can be as long as 1000 km,while in countries where business travel relies on motor vehicles, we would expectthat distance to be in the magnitude of 200 km (one way). Beyond this distance(or comparable travel time), the interaction costs must include the accommoda-tion expenses, which widen the relative cost advantage of telecommunications.

I- -

o

f

, " J.' II

~ m m

I

.]TELEeOMMUNICATION

D ISTANCE

Fig. 1 . Schemat ic re la t ionship of the costso f d i s t a nc e i n t e l e c om m unic a t ions a ndt r a nspor t a t i on


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Transportation and telecommunicationcosts 27T h e d i s c on t inu i t ie s o n t he t e l e c om m un i c a t i ons - ba s e d s c he du l e a r e de t e r m i ne d

by the suppl i e r , p r imar i ly on revenue cons ide ra t ions , a l though t echnica l andpol icy factors may a lso play a role . In most cases , these discont inui t ies fol low thebounda r i e s o f " a r e a c ode s " , pe r ha ps de f i ne d f r om a m a r ke t i ng pe r s pe c t i ve , bu tmul t ip le ra t es a l so appe ar wi th in an a rea code . Whi le the ra t es usua l ly re f l ec t d i s-tance, a logical dis tance-dr iven re la t ionship is not necessary. For example , oneU.S . t e l ecommunica t ions suppl i e r d iv ides the cont inen t to two reg ions a long theMiss is s ipp i r ive r. Co mm uni ca t in g wi th in a reg ion for a d i s t ance of 2000 km wi llthus cos t le ss than a 300 km in te rac t ion ac ros s the M iss is s ipp i . In 1984 anoth e rsuppl i e r o f fe re d ra tes to ta l ly insens it ive to d i s tance , whi le m ore recen t ly the re hasbeen a t rend to re l a t e ra t es to d i s tance . Dere gula t ion o f the U . S . t e l ecom mu nica -t ions indus t ry has fac i l i t a t ed such marke t -or i en ted pr i c ing schemes .

Th e spa t i a l d i s t r ibu t ion of the cos t s shown in F ig . 1 i s ob ta in ed by pro jec t ingthe schedules to a geographica l space . Thi s p roduces concent r i c reg ions a rounda cen te r in which the ra t io be twee n the cos ts o f the two in te ra c t ion mo des exhib i td i scont inu i t i e s . For example , a loca t ion ins ide such a r ing provides a g rea te r ad-vantage for t e l ecommunica t ions , whereas a loca t ion jus t ou t s ide of the r ingreduces tha t advantage .

The above d i scuss ion po in t s to the fac t tha t genera l re l a t ionsh ips be tweenc os t s o f d i s t a nc e f o r t e l e c om m un i c a t i ons a nd t r a ns po r t a t i on c a nno t be s t ud i e dana ly t i ca l ly because they va ry wi th contex t s and c i rcums tances . There fore , weha ve e m p l oye d a c a se s t udy a pp r oa c h f o r t he pu r po s e o f l oc a t i on c ost s a nal y se s .We a rgue tha t the dec i s ion-m aker cons ide r ing ( re ) loca t ion choice should ca lcu la teth e total i n t e rac t ion cos t s involved in cond uc t ing bus ines s . I t i s no t sugges ted tha tce r t a in loca t ions a re pre fe r red for a l l i n format io n- in tens iv e ac tiv it i es . We can sug-ges t tha t a f i rm wi th a pa r t i cu la r spa t i a l in te rac t ion pa t t e rn should cons ide rloca t ing in a reg ion which ac com mo date s i ts id iosyncra t i c in te rac t ion needs a t thelowest cos t .

5. Interaction costs: some empirical f indingsTo demons t ra te the d i s t r ibu t ion of in te rac t ion cos t s , some cos t s maps weredeve lop ed for in te rac t ions in I s rae l . In dev e loping th i s case s tudy an d i t s va r i an ts ,m a ny s i m p l i f y i ng a s s um pt i ons w e r e m a de . H ow e ve r , va r y i ng m os t a s s um pt i onsdoes no t a l t e r the major f ind ings .

A f i rm, i t i s assumed, seeks a locat ion which minimizes i t s tota l ( te lecom-munica t ions and t rave l -based) in te rac t ion cos t s . Shefe r (1986) repor ted tha tI s rae l i h igh- tech f i rms spend only a bo ut 2070 of the i r to ta l o pera t ing cos t s onte lecom mu nica t ion s . (New f i rms , cha rac te r i zed by a grea te r sha re of re sea rch anddev elop me nt act ivi t ies , had a mea n exp ense of 3 .170.) Al tho ug h this f igure issmal l , i t i s not ins ignif icant as a factor in locat ion decis ions . The actual expensesw e re no t f oun d t o be r e l a te d t o l oc a t i on , a l t hough pe r c e ive d cos ts s e e m e d t o va r ya m ong d i f f e r e n t l oc a t i ons .

The case -s tudy i s based on da ta for the t e l ephone sys tem in I s rae l . The t e l e -phone , a l th oug h n ot exac t ly a New Info rm at io n Technology , i s s ti ll t he bac kb onef o r m os t t e l e c om m un i c a t i ons - ba s e d i n t e r a c t i ons i n I s r a e l a nd i n m a ny o t he r


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28 I. Salomon and J. Schofercoun t r ies . No te tha t some NIT ' s , such as facs imi le , u se the t e lephone ne twork .A l s o , t h e eco n o m i cs o f N IT s eem t o fo l l o w t h o s e o f t h e t e l ep h o n e .

Th e te leph one ra te s t ruc tu re in I srae l i s based on two d imens ions : t ime-o f -da yand d i s tance . A "message un i t " cons t i tu tes the bas ic charg ing un i t . I t s cu r ren tprice is 0 .1242 NIS (New Israel i Shekels) . Four levels of d is tance are defined bythe du ra t ion o f one message un i t . Loca l ca l l s in mos t cases a re no t t imedepe nden t 2. Ra te A app l ies fo r sho r t d i s tances be yond the loca l ca ll ing a rea , an dis 72 sec. Rate B is 48 sec and appl ies to in ter me diate d is tances , an d rate C is 16 seclong and app l ies to the longes t d i s tances ( the above f igu res app ly a t the peakper iod , in wh ich mos t bus inesses opera te ) . In add i t ion the re is a time-o f -day p r ic -ing scheme, wher e peak t ime is betw een 08:30 and 13:00 and is char ged at the fu l lrates . Betw een 13:00 and 21:00, an in te rm edia te rate app l ies , a t 507o of the pea kra te , and 21 :00 to 08 :30 , the d i scoun t ra te app l ies , a t one s ix th o f the peak ra te .

In add i t ion , subscr ibers a re charged a f l a t mon th l y fee o f 10 NIS , a ndre s id en t s o f r em o t e a r ea s a r e ch a rg ed o n l y a f r ac t i o n o f t h a t , a s a c o m p e n s a t i o nfo r the i r re la t ive ly h igher usage charges , wh ich may have no th ing to do wi th theac tua l cos t o f p rov id ing se rv ice .

In the ana lys i s be low, we exp lo re t e lephone cos t s in I s rae l under vary ingassumpt ions . The geograph ica l un i t s u sed a re the 104 towns and v i l l ages wi thpop u la t ion o f 5000 inhab i tan t s o r mor e (1983), wh ich rep resen t 87% of the I s rae lip o p u l a t i o n .

5 .1 The d i s tance cos t sTh e te leph one ra te s t ruc tu re in I s rae l i s based on the d iv i s ion o f a re a codes , wi than impl ic i t as sumpt ion abou t d i s tance p r ic ing . In t ra -a rea non- loca l ca l l s a recharged by ra te A, w h ich a l so app l ies to some in te r -a rea ca ll s. Th e ra t iona l i s tha tne ighbor ing a rea codes wi l l be charged by e i ther ra te A o r B and a reas tha t dono t have a co m m on bo rde r wi ll be charged a t ra te C . We can f ind very wide var ia -t ions in the d is tance for which each rate appl ies . For example, ra te B is , in someloca t ions , app l ied fo r a d i s tance o f / 6 km an d in o thers fo r a d i s tance o f 250 km.Such dis tort ions seem to be a resul t of h is torical developments , i .e . , the s l ic ing offo f new area codes f rom p rev ious l a rger zones , wi thou t adherence to the c r i t e r iao f e i t h e r d i s t an ce o r co m m o n b o rd e r .

In F ig . 2 , the ra tes app l ied to e ach o f the 104 towns by the d i s tance f rom theth ree met r opo l i t an a reas a re show n ( ra tes a re symmet r ica l in t e rms o f d i rec t iona l i -ty ) . One wou ld expec t a pos i t ive mono ton ic re la t ionsh ip be tween te lephone ra tesand d i s tance i f the genera l ly accep ted theo ry ho lds . Th is f igu re shows tha t a ll o fthe rates r ise with d is tance. T he rates fr om Tel-Aviv (2a) s how a t rue posi t ivem o n o t o n i c p a t t e rn . T h e r a t es f ro m J e ru s a l em (2 b ) an d H a i f a (2 c ) a l so ex h i bi t d is -t an ce d ep en d en cy , b u t b o t h s h o w s o m e an o m a l i e s , w h e re pl ace s fu r t h e r f ro m t h em e t ro p o l i t an a r ea h av e l ow er t e l ep h o n e r a t e s t h an s o m e n ea re r p lace s. T h es e r a t ed i s t r ibu t ions show tha t there a re loca t ions wh ich e n joy te leph one ra tes wh ich a relower than wou ld have bee n impl ied by the i r d i s tance . Fo r in te rac t ion - in tens ive ac-t iv i t i es , such loca t ions o f fe r communica t ions cos t advan tages a t th i s t ime .2 Localmeasured service is being introduced in areas served by digital switches.


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Transportation and telecommunica tion costs 29

,3- A

I2 -

I ~ / ~ ".... . . . J TEL AVIV .. ..

O . . . . . . . ~O 20 40 60 80 t O0 120 140 ! 60DISTANCE (kin)-B

i- 'ii'ii~ !ii ........................................

I .i

f' JERUSALEM .......O , , ,0 20 40 SO 80 fO0 12 0 ! 40 16 0

DISTANCE (km)

3

2 V

HAIFA --o . F i g . 2 . T h e t e l e p h o n e r a t e s t o t o w n s b y

o zo 4o 60 Bo ~oo ~zo ~4 o ~ 6o d i s t a n c e f r o m T e l - A vi v , J e r u s a l e m a n dDISTANCE (kin) H a i f a


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30 I. Salomon and J. Schofe rA n o t he r l e ss on f r om t he s e d i s tr i bu t i ons c onc e r ns t he e qu i t y o f t he r a te s . I t is

a common prac t i ce in regula ted t e l ephone sys tems to apply ra tes which providesom e c ros s -subs id iza t ion wi th in the sys tem 3. Thi s is ev ident , fo r ex ample in thefac t tha t the h igh - t ra f f i c l ink be tween Je r usa lem and Tel-Aviv , on ly 60 km apar t ,i s cha rged by the h ighes t ra t e (C) , which genera tes revenues which can be usedto of f se t cos t s o f more remote low- t ra f f i c l inks . I f the t rue cos t o f s e rv ice i ss t rongly d i s t ance-based , cos t -based ra tes should fo l low a s t ra igh t s chedule of thetype i l lus t ra t ed by the s t ra igh t l ine in F ig. 2 . Loca t io ns un de r a l ine of th i s fo rmare subs id ized by the ra t es appl i ed to loca t ions above tha t l ine .

Th e a c tua l shape of the o f f i c i a l d i s tance-pr i ce schedule wi ll r e fl ec t po l i t i ca ldec i s ions abo ut c ros s- subs id ies , a s we ll as t rue cos t s o f s e rvice . In a gov ernm ent -owned, o r heavi ly regula ted , t e l ecommunica t ions sys tem, the re need be l i t t l e o rno re la t ionsh ip be tween ra tes and d i s t ances . On the o th e r hand , i t i s app aren t tha ta t leas t s o m e of t he c os t s o f t e l e c om m un i c a t i ons s e r v i c e s , f o r bo t h c a p i t a l a ndopera t ion s , a re re l a t ed to d i s t ance. Thi s p rov ides a manag er ia l incen t ive to inc ludes om e d i s ta nc e c om po ne n t i n r a te s, a n i nc e nt i ve w h i c h i s s uppo r t e d by m a r ke t e x-pec ta t ions for th i s k ind of ra t iona l bas i s fo r p r i c ing .

5 .2 M i n i m u m t e l e c o m m u n i c a t i o n s c o s t s z o n e sT o i de n t i f y a m i n i m um c os t s l oc a t i on , a n a c c oun t i ng p r oc e du r e i s s ugge s t e d ,w he r e by t he s um s o f t he p r oduc t s o f t e l e phone t r a f f i c vo l um e s by r a t e s t o t heva r i ous de s t i na ti ons a r e c om pa r e d f o r d i f f e re n t l oc at i ons . T ha t , o f c ou r s e, doe snot ensure the iden t i f i ca t ion of the rea l min ima , un les s a l l poss ib le loca t ions a retes ted. How ever , as a heuris t ic , especia l ly in smal l sys tems, i t is l ikely to pro videa reasonable so lu t ion .

For exam ple , g iven the geog raphica l s t ruc ture of the I s rae l i econo my , it is rea -s ona b l e t o a s s um e t ha t f o r m os t f i r m s , t he i n f o r m a t i on s ou r c e s / de s t i na t i ons a r ewi th in the th ree l a rge met ropol i t an a reas . The cos t s o f ca l l ing the th reem e t r opo l i t a n a r e a s i s t he s um m a t i on o f :

C

where: a =w i =t =r i ~--

i =

a ( w ~ t / r l + w ~ t / r 2 + w ~ t /r 3)t he c os t s o f one m e s s a ge un i t ;the we ight o f d es t ina t io n i (% of ca ll s) ; the se t w . . . w represen t s thei c om m un i c a t i ons m i x f o r a pa r t i c u l a r f i r m ;the dura t ion of in te rac t ion ( seconds ) ; a f i rm-spec i f i c cos t index fora pa r t i cu la r loca t ion might be s impl i f i ed by se t t ing t = 1 ;the ra t e , expres sed in dura t ion of message un i t ;des t ina t ion .

U s e r s ha ve d i f f e r e n t ge og r a ph i c a l pa t t e r n s o f c om m un i c a t i ons . T he r e l a t i ves ha r e o f vo l um e to be e xc ha ng e d w i t h e a c h de s t i na t i on i s a n a t t r i bu t e o f t he pa r -t i cu la r bus ines s type , and loca t ion . For example , l e t us f i r s t a s sume tha t a l l con-3 Suchcross-subsidization has recently been disallowed under the deregulation of telecommunica-tions in the United States and the United Kingdom.


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Transportation and telecommunication costs 31

TEL

HAIFA

/O.MAUAKHI.~X~JERU$ALEMOz

05 I*

"BE'ER SHEV A

05 7

!o.j

0 6

0 I 0 20 30 : r km Fig. 3. The division of Israel intoarea codes, 1988


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32 I. Salomon and J. Schofertacts are in Tel-Aviv, the largest metropolitan area. The obvious minimum costlocation would be within the boundary of the local telephone exchanges, wherelocal calls are not time measured, but are charged at the rate of a single messageunit. On the other hand, if we assume that the interactions of a firm are equallydistributed between the three metropolitan areas, and we consider the telephonerates alone, then the minimum cost location would be at area code 085 which in-cludes the towns of Ashdod and Kiryat Malachi (see Fig. 3). This area is outsideof the triangle formed by the three metropolitan areas.

This seemingly paradoxical situation is a result of the deformation of the dis-tance-cost relationship in telecommunications rates. By contrast, in the case oftransportation, the minimum cost location is at one of the three nodes, as thecosts are directly related to distance, and in addition, there are usually terminalcosts which can be reduced or eliminated if one locates at a terminal. In the caseof telephone traffic there are some similar "terminal" costs, referred in the nextsection.

Varying the ass umption abou t the spatial distribution o f interactions result indifferent preferred locations. When the weight of commu nicati ons to Tel-Aviv in-creases to 507o or more, a nd the remainder is equally divided between Jerusalemand Haifa, then the minimum cost location is in Tel-Aviv. As Tel-Aviv is the centerfor many economic activities, the distribution of telephone rates provides yetanother incentive for agglomeration.

In summary, the analysis of the telephone rates shows that a firm considering(re)location might benefit fr om an examination of its interaction patterns to iden-tify the location which provides its particular min imu m telecommu nication costslocation. This is a location which is in part determined by the (current) structureof telecommunications rates; anachronistic rates, which are not unusual, implythat the minimum communications cost location may not be intuitively obvious.

5.3 Considerat ion of transportat ion costsTransportation costs exhibit greater sensitivity to distance than telecommunica-tions costs. Given that in most cases the expenses for transport are borne directlyby the user, there are usually fewer anomalies in the cost to distance ratio. Whenfares are charged by a supplier of transportation services, they may distort the ac-tual costs, due to cross-subsidization, marketing or regulation considerations.

In the current analysis, we assume that the decision-maker facing the choiceam ong alternative interaction modes considers the costs of travelling by car 4.The car may be a company car or a private automobile, where a fixed rate perkilometer is applied for reimbursement. For July, 1988, the rate in Israel was0.3685 NIS s per km.

4 Travelby transit is a less relevant option. In Israel, and elsewhere, transit is heavily subsidized,and its cost structure is irregular. More importantly, transit would not be the intercity mode of choicefor the business traveler. In larger countries, the logical option might be air or rail travel.s The rate calculated by Cheshev (1988), of 0.67 NIS for a 1300 cc vehicle includes income tax andsocial security. To exclude these, we subtracted an assumed rate of 40% and 5%, respectively.


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Transportation and telecommunicationcosts 3340

30

TRANSPORTATION . . . . . . . . . , ,$ / TELEPHONE (60 MIn.) .,,.- a"TELEPHONE (25 MIn.) . . . . . . . . . . . . . , . "

draS*'a,,,s~ Sw

o s , , s S~ 2 0 o-"ae a

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a s ~ . . . . . o o o , . . . . . . . , o . . . . . . . . . o . . . . . .

. , . , l, - . ............................... . ...................O,0 l b 2'0 3b 4'o s'o 6'o 70DISTANCE (km. )

Fig. 4. Transportation and telephone rates by distance from Tel-Aviv

To the cos t o f t ravel i t is necessary to add the cos t o f t ime spen t t ravel l ing .As a work ing assumpt ion we used the va lue o f t ime o f 10 NIS per hour , and acons tan t speed f igu re , so tha t the t ime loss i s on ly a func t ion o f d i s tance . Th isbiases the costs in favor of c lose locat ions , as t ravel t ime with in metropol i tanareas a re p ropor t iona te ly longer , due to conges t ion . Moreover , we ignored the" te rm ina l cos t s " , nam ely the t ime cos t s fo r veh icle access and par k ing which con-sumes greater shares in short , urban t r ips .

The cos t schedu les fo r t ranspor ta t ion and te lephones by d i s tance f rom Tel -Aviv are shown in Fig . 4 . Th e te lep hon e costs are for 25-min an d 60 -min cal l dura-t ions. Th e f igu re shows on ly the range o f up to 70 km, because the schedu lesdiverge for greater d is tances as suggested in Fig . 1 . The schedules in tersect in theran g e o f ab o u t 1 0 k m an d ag a i n a t ab o u t 4 8 k m . T h i s m ean s t h a t fo r t he s e p a r-t i cu la r d i s tances, un der the as sumpt ions inco rp ora ted in th is nume r ica l example ,i t i s more economica l to t rave l fo r a one hour meet ing than to t e lecommunica te .Her e we mean econom ica l in the sense o f f inanc ia l cos ts , s ince we have assumedabove tha t the same message i s communica ted , and wi th an equa l in te rac t iondura t ion . Such in te rsec tions have been found in s imi la r ana lyses we cond ucted fo rvar ious t e lecom mun ica t ions m odes in the Un i ted S ta tes fo r re la t ive ly shor td i s tances , o f up to 300 km or so (Sa lo mon e t a l . 1989) . Whi le the d i s tance a twh ich they occur var ies accord ing to the as sumpt ions , i t is c learly a phe nom en onassoc ia ted wi th shor t d i s tances .

Sensi t iv i ty analyses showed that these resul ts , the occurrence of t ravel cos tslower than te lecom mun ica t ion s cost s fo r ce r ta in di s tances , were robus t u nder thefo l lowing cond i t ions :


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34 I. Salomon and J. SchoferIncreasing the value of time up to 20%.Testing three different speed levels, to reflect distance from the congestedmetropolitan area.Combining increases in value of time and speed of travel.

None of these changes modified the basic results. Beyond the 12 NIS per hourvalue of time, the travel option does become consistently more costly than thetelephone cost. This expected result suggests that, strictly from a cost perspective,travel for higher paid personnel is more expensive than communicat ions. It is im-port ant to recognize, of course, that we are assuming that the productivi ty of theiractions is the same under both modes.

5.4 Other costsIn addition to the transportation and telecommunication costs, there arenumerous other location-specific costs which affect the cost distribution map.Some of these are indirectly associated with telecommunications. For example,Shefer (1986) points ou t that although the expense for telecommunications in thehigh-technology firms he surveyed was only two percent of the operating costs,managers at the firms believed telecommunications costs were important decisioninputs. He suggests that the direct costs are only a fract ion of the costs perceivedby the users. Indirect costs include the costs of poor communications, such asproblems or miscommunications in placing orders, sales etc. and the costs oflabor or automatic dialling equipment employed to establish communications ina congested area.We hypothesize that in Israel, a major perceived cost component is associatedwith network congestion. Analogous to the terminal costs in transportation, thecosts of "getting through" at the peak period may be high, although it may notbe experienced as a direct financial expense as in transportation. As telephonecongestion levels are likely to be geographically differentiated, the congestion ef-fect may play a role in the cost map considered by location decision-makers. Atleast at an anecdotal level, some telephone links in Israel seem to be more con-gested than others, and hence we would expect that high-volume firms will avoidlocating at their ends. On the other hand, many of the entities with which theycommunicate may be in high density locations, so avoiding congestion costs maynot be a simple matter of selecting the right location.Spatial costs differentials are par tially off-set by spatial incentives provided bygovernments. Such policies are in effect in some European countries, includingthe Netherlands, the Federal Republic of Germany and the United Kingdom. InIsrael, government spatial policies provide capital cost assistance to encouragefirms to locate in preferred areas. The magnitude of these incentives can dwarfthe telecommunications costs factor for those firms which have decided to locatein developing areas (Shefer 1986).The costs of conducting business should thus include not only the transporta-tion and telecommunication costs but also the indirect costs of interaction overspace and other costs that reflect level-of service and spatial incentives providedby governmental intervention.


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T r a n s p o r t a t io n a n d t e l e c o m m u n i c a t i o n c o s ts 3 5

Fig . 5 . Te lephone ra tes f rom Je rus a lemO 20 30kin

6. The implicationsWe have demonstrated above that telecommunications and transportation costsschedules exhibit different sensitivities to distance and to the duration of a con-tact. The premise of this paper is that decision-makers involved in location choiceface a "cost map" which reflects informat ion on the spatial distribution of thecosts of conducting business.

Careful analyses of the relative costs of transportation and telecommunica-tions would reveal the existence, at least in the short-run, of preferred locationswhich provide local cost minima. Similar situations where found in theNetherlands (Dieperink and Nijkamp 1987) and in the United States (Salomonet al. 1989).

Given the existence of locations which, due to discontinuities, offer lowercosts than would be expected on the basis of a distance function, firms ought toevaluate their interaction costs in detail. In some locations firms may enjoy lowtelephone rates combined with some other spatial incentives. The geographicaldivision into area codes does not overlap with the division to "preferred develop-ment areas" designated by the government, nor with the distance from Tel-Aviv.Therefore, it is possible for a firm to seek a location which provides the best com-bination of government incentives, telecommunications and transportation costs.This is clearly the advantage that the town of Yavne (see Fig. 5) offered in the past(until it was removed from the preferred locations list of the Ministry of Com-merce and Indust ry in 1982). Today, locations in the West Bank such as Arielcombine the best combination in terms of the various location factors considered


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36 I. Salomon and J. Schoferhere du e to a se r ies o f po l i t i ca l dec i s ions . F igure 5 demon s t ra tes the d i s to r t ionso f t e leph one ra tes re la t ive to d i s tance f ro m Jerusa lem in the cen t ra l par t o f I s rae l.As can be seen , the t e lephone ra tes f rom Jerusa lem to the 085 and the 051 a reasare lower than those to the c loser 08 and 03 a reas .New se t t l emen ts in re la t ively sparse ly popu la te d reg ions p resen t a specia l casei n t e rm s o f t h e i r t e l ep h o n e r a te s . Th e i r co n n ec t i o n t o t h e t e l ep h o n e n e t w o rk cantake d i f fe ren t fo rm s . I f a cab le ne tw ork ex it s in the reg ion , they a re phys ica lly con-nec ted to i t . However , a common shor t - t e rm so lu t ion where cab le i s unava i lab lei s to connec t them v ia microwave rad io l ink to a remote exchange . In tha t caset h ey b eco m e p a r t o f an a r ea co d e w h i ch i s n o t g eo g rap h i ca l l y co n t i g u o u s w i t hthem, as can be seen fo r the A r ie l a rea in F ig . 5 . Subscr ibers in Ar ie l en joy theA rate to Tel-Aviv , some 30 km away, whi le subscribers in Be t-Shem esh, a t as imilar d is tance are charged the h igh C rate to Tel-Aviv . When combined with theincent ives g iven to new set t lements in the West Bank, th is provides a s ignif icantadvan tage fo r loca t ing in Ar ie l , a t l eas t fo r the p resen t . However , as in the caseo f Yavne , such advan tages , be ing an ou t com e o f cu r ren t go vernm en t po lic ies , caneasi ly be el iminated in the fu ture.

Th e cos t s ma p is p rob ab ly a fuzzy men ta l map , a t best , fo r dec i s ion -makers ,s ince we assume tha t mo s t do no t inves t the resources requ i red to genera te an ac-tua l map , g iven the smal l Share o f t e lecommunica t ions cos t s ou t o f the to ta lopera t ing expenses and the impor tance o f o ther fac to rs in the loca t ion dec i s ion .I t is p ro b ab l y b a s ed o n a co m b i n a t i o n o f an ecd o t a l i n fo rm a t i o n , s o m e f ac t u a l in -fo rmat ion on te lephone ra tes and ac tua l t e lephone b i l l s , and the genera l spa t ia ld i s t r ibu t ion o f the f i rm 's in te rac t ions . As f uzzy as it may be , th i s conce p t s ti ll p ro -v i de s t h e d ec i s i o n -m ak e r w i t h s o m e r e lev ant b ack g ro u n d i n fo rm a t i o n fo r ch o ice .

The dec i s ion -m aker may face two bas ic cho ice s itua t ions . In the shor t - run , heo r she may change the in te rac t ion pa t te rn o f the f i rm so as to reduce the cos t s .Th is ma y imply changes in the mod es used , the t iming and the con tac t pa t te rn .In the long-run , in add i t ion to the above po ten t ia l sav ings , he o r she may dec ideto relocate .Even in the case tha t a map i s p roduced , there remains subs tan t ia l room fo runcer ta in ty . Ex te rna l sou rces o f uncer ta i n ty inc lude the poss ib i li ty tha t in the dy -namic techno log ica l env i ron men t , cos t reduc t ions wi ll be rea l ized , (as is so o f tensugges ted in th i s con tex t ) o r tha t the reg u la to ry env i r onm en t wi ll change , thus a f -fec t ing the econo mics o f in te r ac t ion ( the case o f Yavne , descr ibed above) . As thedec i s ion -maker in a f i rm has no con t ro l o f these , he o r she may dec ide to ignorethem, a l tho ugh the sub jec t ive expec ta t ions may a f fec t the cho ice ou tcom e. O fgrea te r impor tance , perhaps , a re the in te rna l uncer ta in t ies abou t fu tu re pa t te rnso f a f i rm 's opera t ions , pa r t i cu la r ly a f te r a majo r loca t ion a l change 6. Th e ac tua lp a t t e rn o f co m m u n i ca t i o n s i n a n ew l o ca t i o n m ay b e d i f fi cu l t t o an t i c i p a te an dcou ld be subs tan t ia l ly d i f fe ren t f rom the expec ta t ions deve loped p r io r to themove . New c l ien te le and supp l ie rs , p rev ious ly unkn own , ma y p rove to c hange thegeograph ic pa t te rns o f in te rac t ions . The ac tua l pa t te rns o f in te rac t ion wi l l evo lvefo l lowing the im plem en ta t ion o f a loca t ion change . Befo re tha t , the dec i s ion -

6 For a formal discussion on this aspect of uncertainty see Papageorgio and Pines (1988).


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Transportation and telecommunicationcosts 37mak er has on ly a s e t o f expec ta t ions wi th regard to the spa ti a l , t emp ora l an d co n-t e n t d i m e ns i ons o f bo t h i n tr a - a nd i n t e r - o r ga n i z a ti ona l c om m uni c a t i ons .

T he na t u r e a n d de g r ee o f unc e r t a i n t y a s s oc i at e d w i t h f u t u r e ne e ds a nd c ost sp r ob a b l y va r y w i th t he type of loca t ion dec i s ion be ing made . Three broad c las seso f l oc a t i on c ho i c es , in o r de r o f i ncr e a si ng unc e r t a i n t y a bou t f u t u r e c om m uni c a -t ions pa t t e rns , a re : 1 ) those made by es tab l i shed f i rms which a re cons ide r ingr e l oc a t i on ; 2 ) t hos e m a de by f i r m s c ons i de r i ng b r a nc h i ng o f s om e o f t he i r a c -t iv i t i e s to addi t iona l loca t ions ; and 3) those made by new f i rms looking for the i rin i ti a l bases o f ac t iv i t ie s . Th ose f i rms fac ing dec i s ions involv ing le ss unce r ta in tya bou t t he i r f u t u r e c om m uni c a t i ons pa t t e r n s m a y be be t t e r a b l e t o be ne f i t f r omc a r e f u l e va l ua t ion o f c om m u ni c a t i ons c ost s m a ps . F i r m s ha v i ng m or e u nc e r t a i n t yin th i s d im ens ion ma y f ind th i s exerc ise use fu l on ly i f the co mm unic a t ion s cos t sm ap var ies subs tan t i a l ly over the re l evant space, an d where the va r i a t ions a re l ike -ly to remain s t ab le for some t ime to come.Why i s uncer t a in ty re l evant to the cur ren t contex t? In making a loca t iona ldec i s ion based on the exp ec ted cos t s, the dec i s ion-m aker i s like ly to co ns ide r ther i sk , o r the cos ts of ma king the wron g dec i s ion . Th e f ind ings presented above im-ply that in smal l countr ies or regions , the r isk level i s subs tant ia l ly lower than inla rge r ones , due to the re l a t ive cos t s of t rave l vs. t e l ecom mun ica t ing . Co m-m un i c a t i ng w i t h r e m o t e l oc a t i ons e i t he r f a c e - to - f a c e o r by t e l e c om m uni c a t i onsdoes not involve s ign i f i can t cos t d i f fe ren t i a l s in smal l reg ions .

Whi le the cos t d i f fe ren t i a l s be tween the two modes of in te rac t ion in smal lreg ions a re re l a tive ly smal l, a nd hence we do not expec t ma jor loca t ion a l impac t sof NIT, the r i sk involved in t ak ing ad vantage of N IT i s a l so smal l. Th us , dec i s ion-makers in smal l count r i e s or reg ions might be more wi l l ing to make a loca t iondec i s ion based on the ava i l ab i l i ty of NIT. Thi s would depend on the re l a t ivem a g n i t ude o f t he r i sk c o m pa r e d t o t he ga i ns ob t a i ne d i n r e l oca t ion .

For the ind iv idua l dec i s ion-maker , the above f ind ings imply tha t a heur i s t i cp r oc e du r e f o r i de n t if y i ng m i n i m um c os t loc a t i ons s hou l d i nc l ude t he f o l low i ngsteps:1) F i rs t, i de n t i f y c u r r e n t pa t t e r n s o f c om m uni c a t i ons o f t he o r ga n i z a t i on , bo t ht ranspor ta t ion and t e l ecommunica t ions . In concept , a t l eas t , t hese pa t t e rns a re int he f o r m o f o r i g i n - de s t i na t i on - du r a t i on t a b l e s .

2) Ext rapola te these pa t t e rns to the fu ture , based on forecas t s or s cenar ios ofthe ways in which the organiza t ion wi l l change in the fu ture , pa r t i cu la r ly wheni t ( re) locates . I t i s ent i re ly conceivable that di fferent future pat terns wi l l resul tsf rom di f fe ren t loca t iona t a l t e rna t ives .3) Exa min e the com mu nica t ion s cos ts , ra t es s chedules and o th e r spa t i a l incen-t ives, iden t i fy ba r r i e rs , such as d i scont inu i t i e s in ra t es or in gov ernm ent suppl i edsubsid ies . A lon g these d i scont inu i t i e s a re l ike ly to be the m in im um cos t loca t ionswhich can then be examined in de ta i l .4) Es tam ine co mm uni ca t io ns cos t s like ly to be exper ienced a t loca t ions a t o rnear the d i scont inu i t i e s ident i f i ed in s t ep 3 . Look for min imum or low cos t loca -t ions which are otherwise feas ible .5) Re c ons i de r t he c om m uni c a t i on pa t t e r n ( o r i g i n - de s t i na t i on t a b l e s ) w i t hr e ga r d t o t he c a nd i da t e l oc a t i ons , t o de t e r m i ne w he t he r t he pa t t e r n m i gh t besubs ta nt ia l di ffe rent a t tho se places . Recycle to s tep 4 as necessary.


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38 I. Salom on and J. Schofer6) Assess the robus tnes s of candida te loca t ions in the face of uncer t a in t i e s in

c om m u ni c a t i o n pa t t e r n s; t e c h no l og y e vo l u t i on a nd c os t s t r ends ; a nd go ve r nm e n tpol i cy and regula tory prospec t s .D e c i s ion - m a ke r s , o f c ou r se , c ons i de r a ho s t o f o t he r f a c t o rs be yond i n t e r a c t i onc ost s. T he y m os t l ike ly do n o t s ee t he t w o c om m un i c a t i ons m ode s a s f u l lysubs t i tu tab le , a s we have as sum ed above . Th ey ma y as s ign gre a te r we ight to thet ran spo r ta t i on cos ts , because they a re expli c it , pa id d i rec t ly as a func t io n of t ravelpu rcha sed, an d l ikely to be increas ing or s table , a t leas t in re la t ive terms, w hi let e l ecommunica t ions genera l ly have oppos i t e charac te r i s t i c s . In a l a rge count ryt he s e c ons i de r a t i ons m i gh t w e a ke n t he a t t r a c t i on o f r e m o t e l oc a t i ons .

7 . Co nc lus io ns

There a re s evera l p rac t i ca l impl ica t ions of the f ind ings presented above . F i r s t , i tis c le a r t ha t t he r e is no un i f o r m t r a ns po r t a t i on - t e l e c om m un i c a t i ons c os t p la ne i nthe rea l wor ld . Thi s impl ies tha t the re i s room for a case by case ana lys i s of theac tua l cos t map. Second, the cur ren t p r i ce schedules c rea te an i r regula r map,w h i c h m e a ns t ha t i t m a y be pos si b l e to f i nd p l a c e s w h i c h o f f e r c om m u ni c a t i o ncos t advantages , a t l east for the present . Thi rd , in te rac t ion cos t s a re on ly a smal ls ha r e o f t o t a l ope r a t i ng c ost s a nd t he r e a r e m a n y non - c os t r e l a te d f a c t o r s w h i c ha f f e c t l oc a t ion . H e nc e , t he e xac t na t u r e o f c om m un i c a t i ons c ost s m a y be o f on l yl i m i te d i m por t a nc e . T hus , i n t he ne a r t e r m , N I T s hou l d n o t be e xpe c t e d t o p r o -duc e m a j o r a l t er a t ions i n t he s pa ti a l pa t t e r n s o f the e c onom y .Th e pol i cy impl ica t ions of the f ind ings presented abov e a re of two types . F i rs t ,f rom a government or suppl i e r ' s pe rspec t ive , i t i s c l ea r tha t ra t es can be con-s t ruc ted so as to c rea te spa t ia l d i f fe rences to su i t po l icy objec tives . Thi s m ay in-c lude inves tments in in f ras t ruc ture to of fe r adv ance d se rv ices to l es s favored a reasand re lax conges t ion in dense t ra f f i c a reas . Dec i s ions about such inves tmentss hou l d be s e ns i t i ve t o t he r e l a t i ve ( un ) i m por t a nc e o f c om m uni c a t i ons c os t s i nloca t io n dec i s ions . Pol i cy makers should a l so recognize tha t p r iva te dec i s ionm a ke r s w i ll be c onc e r ne d a bou t unc e r t a i n t y , a nd pa r t i c u l a r ly a b ou t t he pos s i b il i tytha t loca t io na l incent ives mig ht l a t e r be eas i ly removed, thus ne ga t ing an y fu turebenef i t s .O n t he o t he r h a nd , f r om t he i nd i v i dua l f i r m ' s pe r spe c ti ve , t he r e is r oom f o rc lose exam ina t ion o f the cos t map so as to cap i t a l i ze on the preva i ling ra te s t ruc -ture and ava i l ab le t echnologies , among o the r loca t iona l fac tors . However ,e v i de nc e p r e s e n t e d he r e s ugge s t t ha t t he i m pa c t s o f t e l e c om m uni c a t i ons r a t e s( re la t ive to t r ansp or t cos t s) wi l l p ro bab ly be qui t e smal l , a t l eas t for smal l reg ions .

Pol i c i es a imed a t fos te r ing reg iona l deve lopment can u t i l i ze t e l ecommunica -t ions t echnolog ies a s a too l for tha t end . However , the impac t s o f NIT on dev e lop-m e n t a r e st il l no t p r ope r l y unde r s t oo d . N a i ve f o r e ca s t s a bou t t he i m pa c t s o ft e l e c om m un i c a t i ons r e l y on a s s um pt i ons w h i c h , w h e n e xa m i ne d c a re f ul ly , se e mt o c on t r a d i c t t he c onv e n t i ona l w i s dom on t he de c e n t ra l iz i ng e f f e c t o f t he s et e c hno l og i e s . T h i s pa pe r ha s s how n t ha t a t l e a s t one c om m on a s s um pt i on , t ha tt e l e c om m uni c a t i ons c os ts a r e l ow e r t ha n t r a ns po r t c ost s, doe s no t ne c e s sa r i ly a c tin the d i rec t ion of re l ax ing loca t ion cons t ra in t s .


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Transporta t ion and te lecommunica t ion cos ts 39Acknowledgement. The auth ors wish to than k U ri Ben-Zion, Danie l Shefer and Frank Boekema forcomments to an earl ier version, to two anonymous reviewers for very st imulat ing and construct ivecomments , and to Micha l Kidron for produc ing the maps .

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