Supervision and cost efficiency in banking

This paper suggests a link between bank operating efficiency and federal supervisor. Since supervisory priorities can vary by the context in which the supervisor was conceived, resulting differences in supervisory policies and procedures may underlay differences in the operating efficiency of their supervised banks. The effect on bank operating expenses is estimated at the individual bank level for each of four size strata using a translog cost function, controlling for bank characteristics and the impact of scale and scope economies. Results generally support a conclusion that bank operating cost differences exist by supervisor, except in the largest size stratum.The authors gratefully acknowledge helpful comments and suggestions from Seungmook Choi, Cary Collins, Curt Hunter, Bradford D. Jordan, Richard H. Pettway, John D. Stowe, Larry Wall, and Jim Wansley, and others at the University of Missouri and Northern Illinois University.     

Scale Economies In Cellular Telephony: Size Matters

Strategic positioning and potential cost savings are popular explanations for growing consolidation in the wireless telephone industry. This research estimates economies of scale for a large panel of GTE Wireless cellular market areas. Contrary to previous findings, our results indicate scale economies exist throughout the system and provide a rationale for the industry trend of consolidation.     

A Fourier analysis of the US dairy industry

Measurement of economies of scale and scope is particularly important for predicting growth and product diversification. However, estimates are useful only to the extent the underlying production technology is modelled accurately. This study measures economies of scale and scope in the rapidly changing US dairy industry with a Fourier flexible cost function, which provides a global approximation of the unknown function. We use the high quality national Agricultural and Resource Management Survey (ARMS) survey data. We find economies of scale at most firm sizes and persistent economies of scope across firm sizes in this industry, which is counter to estimates from two Diewert‐flexible functional forms.     

Economies of scale for broadband in rural United States

Empirical cost models for wireline broadband circuits are used to test whether economies of scale exist in rural areas and whether new Ethernet technology lowers the unit cost of broadband transportation. Previous studies have shown small or nonexistent economies of scale for wireless technology. Results from earlier studies also demonstrated economies of scale for voice-only wireline networks which diminished with network size and were fully exploited for large networks. To our knowledge presence of economies of scale for wireline broadband networks has not been tested, certainly not in rural United States. We use data supplied by more than 500 rural local exchange carriers and find economies of scale for small rural wireline broadband providers. Market size limitations appear to prevent rural telephone companies from fully exploiting unit cost savings. The data also show increasing capacity over existing broadband connections is subject to substantial economies of scale, but such economies diminish quickly as bandwidth capacity increases. The data do not support the hypothesis that Ethernet technology reduces broadband transmission cost.     

Electric power distribution: economies of scale,mergers, and restructuring

Electricity distribution is generally viewed as a natural monopoly and therefore as having the least potential for the kinds of reforms that have swept the electric power sector in many countries. Mergers among distribution companies and efforts at retail competition have nonetheless altered the operation of the distribution stage. This research into US electric utilities uses a much larger and less selective data base than previously available to examine the scale properties of distribution with respect to output, distance, and customer numbers, and for different functions within distribution. It finds significant economies at low output levels, holding system size and customer density constant, but the cost gradient is otherwise modest. It also finds that geographic size and customer numbers are quite important and that economies are significantly stronger for the infrastructure or ‘wires’ business than for the marketing function performed by distribution utilities. These results lend credence to efforts at retail competition that separates these functions, but cast doubt on the benefits of mergers between distribution systems.     

Is big better? On scale and scope economies in the Portuguese water sector

The ‘big is better’ idea has recently been challenged in network industries. Scale economies are considered finite so that for the individual utility an optimal scale of operations arises. A similar observation yields for scope economies as joint production is not predicted univocally anymore. In the water sector, scale economies and joint production are preferred. Nevertheless, several countries are restructuring the sector in order to improve the scale and scope of operations. This article intends to provide some insights into this matter. We analyze the Portuguese water market structure using non-parametric techniques with data from the year 2005. After surveying the literature on scale and scope economies, we discuss the peculiarities of the Portuguese water sector. The paper confirms the natural monopoly features. Although scope economies are absent, it highlights scale economies. The optimal scale of the utilities is located between 160,000 and 180,000 inhabitants. As such, the Portuguese water sector optimally counts 60 water utilities.     

Scope economies in the pharmaceutical sector

The paper’s objectives are twofold: to propose an experimental simulation to measure scope economies between pairs of submarkets and to point out the role of submarkets in explaining the concentration level in the pharmaceutical market. We simulate scope economies consistent with the diversification choices of large international companies in the years 1987 and 1997. Our results suggest that: i) the random diversification (that is no scope economies hypothesis) is rejected, and ii) scope economies are significant. (JEL: C15, D21, L11, L65)     

Comparing the costs and benefits of diversification by regulated firms

Previous work on the diversification of regulated firms has focused exclusively on either the costs of cross-subsidy or on the welfare gains resulting from economies of scope. Using theory and numerical simulations, we identify conditions under which gains from economies of scope and increased competition tend to outweigh the costs of cross-subsidization. We use a perfect competition model of the unregulated market to examine tradeoffs under economies of scope. Effects of increased competition are assessed using Cournot models with linear and constant elasticity demands. Diversification tradeoffs depend upon magnitudes of variables that regulators should be able to estimate or otherwise judge.     

An Empirical Examination of Entry Patterns in Local Telephone Markets*

In this analysis we examine the market entry patterns of new local telephone companies. We construct and estimate a multinomial logit model using information describing numbering code distribution within local telephone markets and the associated income, density, and regulatory characteristics of these markets. Our findings support the conventional wisdom that facilities-based entry by new local competitors is more likely to occur in large urban telephone markets. In addition, we present evidence that, with the exception of territories served by Ameritech, entry is more likely to occur in Bell Operating Company service territories.     

Scope economies and technical efficiency of cocoa agroforesty systems in Ghana

A number of studies have addressed issues relating to the physiological, environmental and economic values of trees in cocoa farming systems. However, to date, little has been done to quantitatively examine the effect of crop diversity on cocoa farming efficiency. This study therefore sets out to first investigate whether and to what extent crop diversity (defined as the mixing of cocoa with other crop species on farmers' plots) affects productivity on cocoa farms. Secondly, it sought to establish whether there are economies of scope (i.e., cost complementarities) from the sharing of farm inputs by crops on the same plots. Our results indicate that diversified (i.e., multi-crop) cocoa farms are more efficient than single (i.e., mono) crop farms. Furthermore, our estimate for the economies of scope parameter indicates possibilities for cost complementarities between production of cocoa and other crops on the same plot. We advocate further investigation on the issue of scope economies to determine which crop combinations offer better cost complementarities and also meet biodiversity conservation objectives.     

Estimation des Économies D'échelle et de gamme dans de petites coopératives de services financiers: le cas des caisses populaires acadiennes

This study uses accounting data stemming from 80 credit unions affiliated to the "Fédération des caisses populaires acadiennes" to estimate a multi-product translog cost function with the aim to test for the presence of scale and scope economies. The cost model relies on the production approach and the financial services are gathered in four categories of products. The model is completed by three inputs and one control variable, the latter being used to capture the heterogeneity of costs arising from the average wealth of membership. Since the estimated output elasticity of the total cost, 0.89, is statistically less than one, the models detect quite important scale economies. As to scope economies, they are present but the coefficients are weakly significant.     

Economies of scale and scope in Flemish secondary schools

This study estimates a multiproduct translog cost function for the entire population of 1011 Flemish secondary schools in order to determine the degree of ray and product specific (dis)economies of scale as well as the degree of (dis)economies of scope. Three types of schools and seven major study fields can be distinguished. Student loads in these study fields are used as outputs produced by the schools. Evidence is found for ray economies of scale for the three types of schools, even at output levels of 300% of the actual means. Although the cost elasticities of six out of seven outputs are close to zero, most of the values indicating the degree of product specific economies of scale are negative (suggesting diseconomies of scale). However, this can be explained by the considerable scope effects which are incorporated in the definition of the product specific economies of scale.     

我国寿险公司范围经济效应的实证研究

我国自1996年实施产寿分业经营以来,人身保险业务快速增长,寿险公司数量急剧增加,寿险公司业务中新型寿险的比重不断上升,呈现出"一险独大"的市场状况。运用超越对数成本函数,对国内29家具有代表性的寿险公司2005-2010年期间的范围经济状况进行检验的结果显示:不同规模和背景的寿险公司的范围经济系数均比较明显,但是很多寿险公司所表现出来的范围经济性具有"欺骗性"。因此,寿险业务结构调整缺乏内部的市场激励,需要强有力的外部力量推动。     

Scale and scope economies for drug abuse treatment costs: evidence for Washington State

Drug abuse treatment has been pervasive in the US in the recent years, and the associated direct treatment costs approached $18 billion in 2001. However, there have been few published studies on scale economies, and none on scope economies, for drug abuse treatment costs. We estimate a restricted cost function for 17 hospitals in Washington State that provided inpatient and/or outpatient drug abuse treatment during the years 1997–2004. We find significant evidence of scale economies for hospitals that provide only outpatient drug abuse treatment services. The marginal costs of outpatient services are even smaller for hospitals that produce both outpatient and inpatient drug abuse treatment services. Further, these joint-production hospitals exhibit diseconomies of scope, or specialization economies. These results all imply that recent trends towards additional outpatient treatment services will enhance cost efficiency.     

Economies of scope and scale in the Norwegian electricity industry

An important issue for multi-product firms to consider is economies of scope, i.e., whether there is any benefit from producing two or more products, or whether specializing in producing only one product would be less costly. We examined the economies of scope for Norwegian electricity companies because policy makers have decided to force companies that both generates and distributes electricity to split their operations into two companies, one engaged in generation only and the other in distribution only. We set out to test the validity of the policy makers decision on unbundling generation and distribution. Using data from Norwegian electricity companies for the period 2004–2014, we found evidence of economies of scope, meaning that policy makers’ insistence on separating generation and distribution companies will have increased costs. We also found evidence of economies of scale, meaning that there are cost savings in expanding outputs. Our findings provide important information to consider in future policy decisions in the Norwegian electricity industry, probably with implications for other countries.     

Explaining efficiency differences among large German and Austrian banks

Cost-efficiency, scale efficiency, and productivity change are estimated by data envelopment analysis; and cost-efficiency is regressed on explanatory variables. No evidence is found for average productivity responding to deregulation over the period studied. State-owned banks are found to be more cost-efficient (likely owing to cheaper funds) and cooperative banks to be about as cost-efficient as private banks. Increasing economies of scale but decreasing economies of scope provide rationale for M&As among banks with similar product portfolios. Interbank and capital market funding is found to be more cost-efficient than deposits when the cost of retail networks is controlled.     

Economies of scope in electricity supply and the costs of vertical separation for different unbundling scenarios

Motivated by the movement towards vertical unbundling in Europe this study measures the economies of scope for the U.S. electricity industry based on a multi-stage cost function. The paper analyzes three unbundling options and finds evidence for synergies that may be explained by coordination and risk effects. Separating generation from networks and retail appears to be the most costly alternative with an average cost increase of 19 to 26%. If generation and transmission remain integrated but are separated from distribution and retail, average scope economies amount to 8 to 10%. A split between the transmission level and the remaining supply stages leads to a cost increase of approximately 4%.     

Looking at the determinants of efficiency in banking: evidence from Italian mutual-cooperatives

Italy has experienced a restructuring and consolidation process in the banking industry since the 1990s that is expected to foster efficiency and competition. Despite the reforms, a peculiarity of the industry is the persistence of small mutual-cooperative banks (Banche di Credito Cooperativo, BCCs) active in narrow markets. The scope of this paper is to analyze the determinants of BCCs’ efficiency in the 2006–2011 period. In the first step of the study, a stochastic cost frontier is used to yield bank efficiency. Then the cost efficiency becomes the dependent variable of fixed and random effect models. The reference market of BCCs is the province (NUTS3). We find that BCC cost efficiency is positively affected by market concentration and demand density and inversely related to branching. Importantly, these results are robust to any sample restriction anchored to the distribution of efficiency. While the evidence regarding the credit quality is inconclusive for all BCCs, the sensitivity analysis shows that the risk in local markets is a source of BCC cost inefficiency.     

Economies of density, scale and scope in the water supply and sewerage sector: a study of four developing and transition economies

Using panel data, we estimate measures of density, scale and scope economies in four countries that differ substantially in their levels of economic development and in their piped water and sewerage coverage: Brazil, Moldova, Romania and Vietnam. We find evidence of economies of scale in Moldova, Romania and Vietnam. In Brazil, we cannot reject the null hypothesis of constant returns to scale. The results of this study show that the cost structure of water and sewerage utilities varies significantly within and between countries and over time.      

Economies with a two-sector representation

Summary In both theoretical and empirical research it is a common practice to partition the economy into (at least) two sectors in order to conduct partial-equilibrium analysis. One merely hopes that general-equilibrium consequences will not obviate all of the analysis of the sector or market in question. In this paper we consider market demand functions which have a two-sector representation. In such economies the aggregate compensated demands in any one sector depend only on prices in that sector, the vector of utilities, and a scalar aggregate which in turn may depend upon everything. In particular, prices in the other sector appear only through this aggregate. In a single-consumer economy this division into two sectors carries with it no further implications. However, when there are three or more consumers, economies with a two-sector representation, which may contain public as well as private goods, must fall into a small number of broad classes which are quite restrictive. This means that the two-sector assumption is far less innocuous than one might have previously believed and that there are some phenomena which simply cannot be investigated in this framework.This research has been supported by the SSHRCC with a research grant and by leave fellowships to all three authors for the year 1984–85. Since then all three authors have been in part supported by various SSHRCC grants. In 1989–90 Blackorby was also partly supported by a Senior Killam Fellowship. The first version was written while all three of us were at CORE, Université Catholique de Louvain, 1984–85. Later versions were written at the University of British Columbia (Blackorby and Schworm), the University of Western Ontario (Schworm), Université Libre de Bruxelles (Davidson), Queen's University (Davidson), Université d'Aix-Marseille II (Davidson), Université d'Aix-Marseille III (Blackorby) and finally GREQE-EHESS (Blackorby and Davidson). We thank all of them for their support. Earlier versions of this paper have been presented at the 1986 Canadian Economic Theory Meetings, the Nuffield Conference on Measurement and Modelling in Economics-May, 1987, the Rheinische Friedrich-Wilhelms-Universität Bonn, the Université de Montréal, University of Saskatchewan, and the University of California at Riverside. We have benefited from the comments of the participants in these seminars, and from those of two anonymous referees.