imposing the “narrow gauge” as a standard. The “narrow gauge” would become the international standard - but not everywhere.
Another example was the standardization of time measurement. In 1844, the clock of the cathedral in Exeter (England) was still set according to the sun, as it had been done for centuries. As Jules Verne’s Phileas Fogg had experienced when circumnavigating the world, accelerated traveling speed challenged assumptions about time. Given that Exeter was a few hundred kilometers west of London, the time set in the clock in the cathedral showed a ten-minute difference from the clock in Greenwich Royal Observatory, which set the time in London. For centuries, no one realized or cared. However, as railways started to connect London and Exeter with prearranged line services, it was necessary to set a common time. This was not a minor issue: poor timing coordination actually led to collisions resulting in deaths. For a while, local times coexisted with “railway time” and clocks often displayed three hands: two would display the local hour and minute, and a third one would display the “railway time.” Eventually, time in all of England and around the world followed the time set by the Greenwich Royal Observatory, known as Greenwich Mean Time (GMT).
Railways brought standardization and rationalization not only on gauge and timing, but in general to the overall management of transportation. Railways require heavy investments in dedicated infrastructure (the tracks). Not only railway infrastructure has a high cost. It is also a sunk cost, as infrastructure cannot be used for other purposes in case of market exit. Railway infrastructure is highly standardized. Rigid rules define all kinds of issues such as track gauge, standards for electrification, signaling, maximum speeds, maximum freight supported by tracks, rolling stock operable over the tracks, training of the drivers, and so on. The operation of the system is highly rationalized, as services are usually organized as prearranged regular services.
Railway infrastructure dramatically increased transport capacity against traditional transport modes, creating new economies of scale. A high number of passengers and a high volume of freight could be transported along railway infrastructure. Only high volumes of passengers and freight would pay back the high cost of building the infrastructure. At the same time, however, scale was the competitive advantage, as the concentration of passengers and freight in a single infrastructure would dramatically reduce the cost of transportation for each single passenger or piece of cargo. Railways brought economies of scale in land transportation. As prices were reduced, new demand for transport was created, initiating a virtuous cycle that transformed the world.
Network effects increase when infrastructure is arranged with a hub-and-spoke structure. Infrastructure supports the transport of passengers and goods to a central hub, where the flow is sorted and redirected to its final destination. This is the classical organization of intercontinental air transport, as passengers fly in small planes from their cities to the hub airport where they can take a larger airplane to travel to a paired hub airport in another continent. This model also works for maritime transport. In this way, it is not necessary to build dedicated infrastructure for point-to-point transportation; the maximum economies of scale are reached in the infrastructure, and the maximum positive network effects are reached.
Infrastructure in transport, but also in telecoms, energy, and water, creates network effects, which is why they were referred to as “network industries.”The number of users of an infrastructure has an impact on each of the users. It will usually be a positive effect, as fixed costs can be distributed across a larger pool of users. However, it can also have negative effects, as the capacity of the infrastructure can become exhausted and congestion can damage the user’s interest, as early morning commuters can confirm.
Some common traits can be derived from infrastructures analyzed as networks. Firstly, the network effects that define infrastructures are usually of the so-called direct type. All users of a transport infrastructure are basically making the same use of the infrastructure and share the same type of impact derived from the use of the infrastructure by other users, either positive (cost reduction) or negative (congestion). Secondly, network effects require investment in the infrastructure, which is usually a risky investment, as it requires large volumes of capital to be deployed before the entry into operations of the infrastructure, it is a sunk cost, and it requires a long period (sometimes even decades) to be recovered in the form of small recurring payments for the use of the infrastructure. Thirdly, the manager of the infrastructure becomes the market coordinator, as he or she has the ability to define routes, frequencies, schedules, type of vehicles, and so on. The management of the network effects will largely determine the success of the operation of the infrastructure. The network manager must incentivize the use of the infrastructure by the largest number of users, which is obtained by sharing economies of scale with users in the form of low prices. However, prices cannot be too low, as they may attract too many users, thus creating congestion. The creation of network effects and, subsequently, the appropriate distribution of the benefits derived from such effects, are the key roles of a network manager.
Network industries, as front runners of industrialization, were built on economies of scale on the supply side. Transport is no exception. Infrastructure generated large capacity for transportation, even if at a large sunk cost. The larger the pool of users of the infrastructure, the lower the cost for each of them, in an evident network effect. The lower the cost of the transport service, the larger the demand, triggering a virtuous cycle that reinforced the infrastructure manager. Infrastructure managers became the organizers and coordinators of the system. As the twentieth century progressed, large infrastructure managers succeeded, often with monopoly rights: railway monopolists, large hub ports supporting large shipping companies, large hub airports supporting hub-and-spoke air companies, large integrated urban transportation systems and so on.