We estimate a transcendental logarithmic (translog) short-run variable cost function for the Italian
railway company, Ferrovie dello Stato (FS), using data on the years 1980–1995. Within the study period,
we show that: (a) the translog function represents a good approximation of the underlying technology of
FS; (b) all production factor demands are inelastic; (c) FS has a limited ability to substitute between inputs;
(d) FS operates with diseconomies of density. A major implication of these findings is that the rail network
is not used optimally, so that either a cut in the frequency of trains or a rise in capital investments seems to
be indicated. Since the estimated cost function is super-additive at the relevant output levels, we derive that
rail service provision in Italy would not behave as a natural monopoly in the absence of regulation. Indeed,
allocative efficiency indicates that there is enough room for a duopolistic industry where joint or specialized
production of passenger and freight carryings would be pursued, mainly depending on firm size.
2002 Elsevier Science Ltd. All rights reserved.