Economies of scale and scope in French commercial banking industry

This paper presents estimations of economies of scale and scope in the French banking industry. Using a translog model of bank costs, the paper demonstrates the existence of economies of scale for French banks, particularly in what concerns operating costs. Economies of scale are observed in all classes of bank size. Results also suggest that cost subadditivity exists in the French banking industry.     

房地产企业多产品结构的经济效益分析

近年来，各地房地产企业发展迅速，实行多元化战略，呈现了多产品结构。本文运用Translog成本函数估算分析了多产品结构的经济效益，提出了“大公司、大企业有最大的范围经济，但其规模经济稳定不变，不能获得较大的成本效益；中等规模的公司可获得较大的规模经济和范围经济，能获得较好的成本效益”的观点。     

Productivity differences in multiple output industries: An empirical application to electricity distribution

Given that electricity distribution is undertaken via a network, it is expected that costs of production are affected both by the nature of the network and the volume of physical output distributed via the network. This two-dimensional concept of firm size, that is involving network size (number of customers) and the level of physical output (kWh), also corresponds to the distinction between productivity measures of returns to density and returns to scale.This approach has been used to specify a restricted multioutput cost function and to estimate this function for the Norwegian electricity distribution industry through the use of a flexible functional form (translog). The results indicate that no economies of scale are present in the industry even for small plants when measured correctly, but that economics of density are present.     

Nonparametric analysis of returns to scale in the US hospital industry

This paper presents new estimates of scale economies for US hospitals. We show that the common translog specification of hospital costs is a misspecification, and employ nonparametric, local linear estimation with both continuous and discrete covariates. A bootstrap method is used to provide inferences regarding ray scale economies and expansion path scale economies for a large sample of hospitals covering 1984–1996. We find evidence of changes in the structure of hospital costs over the sample period, as well as evidence of locally optimal hospital sizes. Copyright © 2004 John Wiley & Sons, Ltd.     

An assessment of Portuguese banks’ efficiency and productivity towards euro area participation

This paper analyses the production technology of Portuguese banks during the 1992–2006 period through the estimation of a translog cost frontier. This period is of major interest because it covers Portugal’s euro area accession and its impact on the banking system. Hence, critical factors impacting the banking system are identified against the background of increasing financial integration prior to the financial crisis that started in 2007 and later translated into strains in some European sovereign debt markets. Banks are modelled as firms which produce loans and other earning assets, choosing the cost minimizing combination of labour, capital and interest bearing debt, subject to holding a predetermined level of equity. According to the results of this study, technological progress has shifted the cost frontier downwards throughout the period under consideration, whereas the distance at which banks have operated from the frontier seems to have remained constant. Further, increases in production under scale economies have also contributed to the recorded increase in productivity.     

Technology and Cost Efficiency in Universal Banking A “Thick Frontier”-Analysis of the German Banking Industry

Using 1992 data of 1490 banks covering about 40% of German banking, we specify a multi-product translog cost function and follow the thick frontier-approach to control for cost inefficiency when evaluating the technology of banking. Scale economies are found to exist up to a size of about 5 billion DM of total assets, with diseconomies being caused by non-operating costs. There is hardly any evidence of economies of scope. Compared to cost inefficiency external factors play a surprisingly strong role in explaining cost differences between high-cost and low-cost banks. Smaller banks turn out to be more responsive to input prices.     

Scope and scale economies in merging hospitals prior to merger

During the 1980s, the impact of the Prospective Payment System and increased pressure from payers for discounts placed pressure on hospitals to become more efficient. An increase in the number of hospital mergers during this period suggests that merger was a strategy used by hospitals to improve efficiency. This hypothesis is tested by estimating multiproduct scope and scale economies in merging hospitals one year prior to the merger and comparing these with a group of controls using estimates from a hybrid translog cost function. Diseconomies of scale were present when the estimated hybrid translog cost function is evaluated at variable means. The results suggest that merging hospitals could obtain operational efficiencies through merger.     

SPATIAL INTEGRATION OF URBAN WATER SERVICES AND ECONOMIES OF SCALE

This research attempts to analyze economic effects of spatial integration of urban water service markets in Korea, employing the notion of economies of scale in terms of cost-effectiveness. The economies of scale are measured by the elasticity of supply with respect to the production cost from the translog cost function of urban water supply enterprises. It was found that the economies of scale in most urban water utility firms of Seoul Metropolitan region have continuously increased during the period 1989–1994. While the economies of scale would be hardly influenced by the changes in population density, they would tend to decrease marginally in response to the rise in employment density. If the urban water markets of the Seoul Metropolitan Region were consolidated into a single water service market without any changes to the current spatial network of water supply and regional economic attributes, the production cost would be reduced up to 47.1 percent of the actual cost in 1994. Those savings would be enough to make up for the financial deficit of the water production of the Seoul Metropolitan Region.     

Economies of scale after deregulation in LTL trucking: a test case for the survivor technique

Early critics of motor carrier deregulation believed that the policy was unwise because strong economies of scale would lead to harmful market concentration, particularly in the industry's LTL segment. Using two methodologies, the survivor technique and the trans‐log cost function, this study finds that economies of scale do extend across the entire spectrum of firm sizes in LTL trucking. Long‐run average cost appears to decline mildly and at a diminishing rate with increases in firm size, however, such that any cost advantage for larger firms has been insufficient to eliminate new entry and competition from smaller rivals. As a result, after the first 20 years of deregulation, the corresponding increase in market concentration has also been mild. Moreover, the consistency of results from the two methodologies gives credibility to the survivor technique as an empirical method of identifying economies of scale. Copyright © 2008 John Wiley & Sons, Ltd.     

Profit, productivity and distribution: Differences across organizational forms - The case of Spanish banks

We examine variations in financial and economic performance as a function of organizational form, and, over time. The forms we consider include Spanish commercial banks, savings banks, and financial cooperatives. We decompose multilateral variation in operating profit, our measure of financial performance, into price and quantity effects. We then decompose the latter into a margin effect and productivity change. Our measure of economic performance, productivity variation, is subsequently disaggregated into technical, cost efficiency, and scale. We find that deregulation and liberalization have acted to narrow performance gaps among organizational forms; this, despite less-than compelling evidence that increased competition has contributed to this convergence. For the Spanish banking system as a whole, the margin effect appears to deliver twice as much financial benefit as do improvements in productivity. Importantly, this finding does not vary across organizational form. Such regularity has an important implication: Incentives for growth are apparently provided by a positive margin rather than by the more elusive benefits of economies of scale and improved cost efficiency.     

Economies of scale in steam-electric power generation in East-North-Central U.S.

In this study the author investigates firm-level cross-sectional unit cost advantages for electricity generation for 31 regulated private steam-electric utilities in East-North-Central U.S. region during 1987. The production technology is modeled using the implied dual minimum total variable cost translog methodology. Estimates of Zellner’s Seemingly Unrelated Regressions indicate a smooth non-homothetic technology, a typical regional firm-level scale economies of about 0.263, and an implied mean cost-output elasticity of about 0.737. Significant scale economies exist for several of the smaller utilities. The findings support policies which steer energy-intensive industrial location decisions in a direction which captures unutilized unit cost economies in electricity generation.     

Scale Efficiency in Canadian Trust Companies

A new method for estimating a relative scale function is derived which does not require the specification or estimation of the firm's cost function. The method is applied to a panel of Canadian trust companies for the years 1985–1988. Results show that the industry scale function is convex with respect to firm size, as measured by the firm's assets. The method avoids a number of shortcomings associated with traditional studies of scale economies in financial institutions.     

Returns to scale in the United States intercity bus industry

This paper has taken into account the a priori restrictions available from neoclassical cost theory in evaluating the relationship between cost and the level of output and input prices for U.S. intercity bus service. A general translog cost function is used which allows tests of the degree of returns to scale, homotheticity and non-constant elasticities of substitution among input pairs. Major empirical findings are: (i) the intercity bus service can be modeled by a homothetic production function, (ii) operators can substitute labor for capital by using vehicles more extensively, (iii) there are potential economies of scale in the provision of intercity bus service, and (iv) the Cobb-Douglas functional form used in earlier studies of the industry is inappropriate.     

Economic efficiency of multi-product structure: the evidence from Korean housebuilding firms

The Korean housebuilding industry has been subject to structural changes since the 1980s. One of the key features is that housebuilding firms have become diversified into a range of businesses and as a result display multi-product structure. This paper examines the efficiency of the multi-product structure of Korean housebuilding firms. For the analysis, translog cost functions were estimated using data for 201 building firms for the 3 years 1993–1995. The empirical results indicate that medium-size building firms enjoy increasing returns to scale, whereas large firms experience constant returns to scale. Korean building firms exhibit significant economies of scope in their diversification activities. Large firms have the greatest economies of scope. These results are consistent with cost efficiency for the multi-product structure of Korean housebuilding firms. The estimated optimum scale suggests that many large firms should expand only through diversification.     

Economies of scale and organization efficiency in banking

Previous studies attempting to assess economies of scale in banking firms have largely relied upon cost functions. The profit-function approach enjoys several important advantages over the cost-function method, consequently that is the approach used in this study. A risk-adjusted profit function estimates economies of scale of unit and branch banks; and the effects of bank holding-company affiliation on the level of bank profits is also examined. The results indicate larger economies of scale for branch banks than for unit banks; and bank holding-company affiliates were found to be more efficient than independent banks.     

Scale economies in electricity distribution: a semiparametric analysis

We estimate the costs of distributing electricity using data on municipal electric utilities in Ontario, Canada for the period 1993–5. The data reveal substantial evidence of increasing returns to scale with minimum efficient scale being achieved by firms with about 20,000 customers. Larger firms exhibit constant or decreasing returns. Utilities which deliver additional services (such as water/sewage), have significantly lower costs, indicating the presence of economies of scope. Our basic specifications comprise semiparametric variants of the translog cost function where output enters non‐parametrically and remaining variables (including their interactions with output) are parametric. We rely upon non‐parametric differencing techniques and extend a previous differencing test of equality of non‐parametric regression functions to a panel data setting. Copyright © 2000 John Wiley & Sons, Ltd.     

Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period*

This paper examines empirically the reasons why Japanese manufacturing firms frequently fail to satisfy concavity of the cost function in input prices. We focus on the ‘bubble period’ in the 1980s when land was in great demand and land prices soared. By estimating the translog cost function with land as one of production inputs, we find that violation of concavity mainly resulted from weak bank–firm relationship and massive transactions of land. We also demonstrate that elasticities of substitution between land and other inputs are estimated quite differently if the firms violating concavity are not excluded from the analysis.     

Regional integration and dynamic adjustments: Evidence from gross national product functions for Canada and the United States

We estimate a translog Gross National Product function and test for endogenously determined structural change allowing for anticipated and lagged responses to regional trade agreements. We found that Canada embarked on a long transition path prior to the implementation of the Canada-U.S. Trade Agreement, a result reminiscent of Magee's (2008) results concerning RTAs’ trade creation effects. In contrast, the United States experienced an abrupt structural change a year after the North American Free Trade Agreement took effect. This reflects that smaller economies benefitting from larger changes in terms of trade are confronted to more complex adjustment processes than larger economies.     

Economies of scale in the Mexican automotive sector

Recent growth of the Mexican motor vehicle industry has sparked a great deal of controversy on both sides of the U.S.-Mexico border regarding the potential effects of the North American Free Trade Agreement. One of the key factors affecting the future competitiveness of the Mexican motor vehicle industry relative to U.S. producers is whether the Mexican firms can exploit economies of scale as their output expands. This article investigates that possibility as well as the direct and cross-price elasticities of demand for the inputs by estimating translog cost functions for the Mexican motor vehicle and autoparts industries. The results are consistent with the hypotheses that substantial economies of scale remain to be exploited by the Mexican motor vehicle industry, but that the autoparts industry is operating with diseconomies of scale. However, the lack of investment in new technology and X-inefficiency on the part of the autoparts firms may have been partially responsible for the latter finding.     

Vertical Disintegration

With economies of scale, a vertically integrated firm can lower its upstream cost by supplying downstream competitors. The competitors may strategically choose not to purchase from the integrated firm, unless the latter's price for the intermediate good is sufficiently lower than those of alternative suppliers. In a simple model of dynamic scale economies through learning by doing, equilibrium vertical disintegration occurs if and only if total industry profit is higher under vertical separation than under integration. The model bridges a logical gap in George Stigler's classic theory on vertical organization, and sheds light on the widely observed phenomenon of vertical disintegration .