A multiproduct Symmetric Generalized McFadden cost function

This paper introduces a flexible multiproduct cost function that permits zero values of one or more of the outputs and can impose restrictions quite easily, if not automatically satisfied, to ensure global concavity property. It satisfies linear homogeneity (in prices) property and is flexible in the output space. Thus the function is ideal for estimating, for example, economies of scope, cost complementarity, product-specific returns to scale, etc., without worrying about zero values of output(s) and extrapolations to points far from the point of approximation. As an empirical application, we use panel data (1978–1985) on 12 Finnish foundry plants to estimate technical progress, overall returns to scale, product-specific returns to scale and economies of scope.     

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.     

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。     

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.     

The cyclical nature of markups in Canadian manufacturing: A production theory approach

In this paper the effects of cost and demand characteristics on the magnitude and cyclical behaviour of markups in Canadian manufacturing are measured within a production theory framework. Price to marginal cost ratios for various manufacturing industries are computed, and the impact art their secular and cyclical trends from changes in capacity utilization, scale economies, variable input prices, import competition, unemployment and other exogenous market and technological determinants are explored using adjusted markup indexes and elasticities. The measured price margins seem weakly procyclical. Further, evaluation of the determinants of these cycles suggests that the procyclical nature of markups is primarily related to exogenous factors affecting costs such as energy price ‘shocks’, and that cost characteristics underlying scale economies provide a countercyclical influence that counteracts the profitability arising from markups.     

The temporal behavior of scale economies within A banking firm

Examining the time path of the scale economies has not received much attention until recently. Moreover, the time path of scale economies for a given firm has not been studied in the banking literature at all. Examining scale economies, either from cross-sectional or panel data, based only on a single estimate ignores the dynamic behavior (both cost- and production-wise) of a banking firm as well as of the banking industry. We study the time-varying scale economies of commercial banking firms. We employ the Kalman-filter approach in estimating the translog cost function. The Kalman filter allows the parameters of the translog cost function and therefore the scale economies to be time dependent and varying. The estimation results indicate significant variation in inter- and within-firm scale economies over time for sample banks.     

Bertrand oligopoly in a spatial context: The case of quantity independent transportation costs

The theory of spatial competition [for a review, see Gabszewicz and Thisse (1985)] is usually based on the assumption of transportation costs which are proportionate to distance and quantity. In reality, however, there exist frequently considerable economies of scale, especially with respect to the conveyed quantity of goods. A good case in point is transportation cost incurred by a consumer patronizing a shopping area. Cost economies of scale will in general influence consumers' optimal choice with respect to quantities and best market places. In the extreme, consumers' outlays on transportation can be considered independent of the purchased quantity, but approximately proportionate to distance. In the present paper, the impact of this assumption on spatial competition is analysed. It will be shown, that existence and uniqueness of spatial oligopolistic equilibrium is restored. Furthermore, due to some residual monopolistic power, prices do not converge to the perfectly competitive equilibrium prices when the distance between the firms shrinks to zero. In conclusion the model exhibits a fundamental difference in the market structure, when the spatial aspect is incorporated.     

Efficiency in the provision of university teaching and research: An empirical analysis of UK universities

A flexible three-output, two-input cost function model is used to examine the cost efficiency of UK universities as producers of teaching and research ‘outputs’. Unlike previous studies, a comprehensive peer review of research quality is incorporated. Overall, product-specific and input-specific economies of scale, global and product-specific economies of scope, marginal costs and cost complementarities are estimated. Overall and product-specific scale results indicate considerable increasing returns, while the scope results generally suggest neither economies nor diseconomies. Sensitivity analysis is used to simulate the impact of current government policy, regarding the expansion of undergraduate teaching output, on these results.     

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 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.     

Product diversification,production systems,and economic performance in U.S. agricultural production

The U.S. agricultural sector is experiencing significant structural change. Farm size is rising and activities are broadening, including more off-farm employment, implying economic incentives for larger and more diversified farms, and complementarities among agricultural netputs. We quantify such patterns for farms in the corn belt, by measuring scale economies, and output and input contributions and jointness. We estimate the multi-output and -input production technology by stochastic frontier techniques applied to output and input distance functions. We find that both scope and scale economies have important economic performance implications, and that an input-oriented framework including off-farm income best characterizes agricultural production.     

Water losses and hydrographical regions influence on the cost structure of the Portuguese water industry

Despite the growing research about water utilities, some questions still remain to be solved on the supply side, which are frequently absent from empirical studies based on the estimation of cost functions. This paper aims to fill to some extent this gap in the literature by focusing the consequences of water losses reduction and the management of water resources based on their availability at an integrated river basin level. Major findings derived from the estimation of a multiproduct cost function suggest advantages from reducing water losses, given that an adjusted measure of economies of scope, adapting the fact that water lost cannot be sold, reveals that there are small diseconomies of scope. In addition, generally the variables related to the hydrographical regions used have significant effects on water costs. Since the outcomes also reveal the existence of economies of scale, more concentration in the Portuguese water industry at the retail level would be beneficial.     

Economies of diversification in the US credit union sector

Significant scale economies have been recently cited to rationalize a dramatic growth in the US retail credit union sector over the past few decades. In this paper, we explore another plausible supply‐side explanation for the growth of the industry, namely economies of diversification. We focus on the fact that credit unions differ among themselves in the range of financial services they offer to their members. Since larger credit unions tend to offer a more diversified financial service menu than credit unions of a smaller size, the incentive to grow in size may be fueled not only by present scale economies but also by economies of diversification. This paper provides the first robust estimates of such economies of diversification for the credit union sector. We estimate a flexible semiparametric smooth coefficient quantile panel data model with correlated effects that is capable of accommodating a four‐way heterogeneity among credit unions. Our results indicate the presence of non‐negligible economies of diversification in the industry. We find that as many as 27–91% (depending on the type and the cost quantile) of diversified credit unions enjoy substantial economies of diversification; the cost of most remaining credit unions is invariant to the scope of services. We also find overwhelming evidence of increasing returns to scale in the industry.     

基于生产函数和成本函数的我国航空运输业规模经济计量研究

运用了规模经济的一般含义和计量方法,并深入分析航空运输业规模经济的成因,然后借鉴规模经济常用的成本函数计量方法,通过柯布-道格拉斯生产函数构造了我国航空运输业成本函数模型,最后利用1990-2009年相关数据对我国航空运输业进行了实证研究,得出了我国航空运输业整体而言存在规模经济的结论,从而为指导我国航空运输业实践提供了依据。     

Comparisons of Economic Inefficiency Between Output and Input Measures of Technical Inefficiency Using the Fourier Flexible Cost Function

The current paper constructs a Fourier flexible cost function, which is commonly known to be a more general function form than the typical translog form, and can globally approximate a true (but unknown) cost function. Both allocative and technical inefficiencies are considered using the Fourier function in the context of the parametric approach. The former is modeled using shadow input prices and the latter is formulated either by adding an extra term of scale parameter (when the Farrell's (1957) input technical inefficiency is assumed), or by correcting all the terms involving output quantities by a scale parameter (when the Farrell's output technical inefficiency is assumed). It is found that sample banks could save up to 23% of total costs, within the range of 3 and 69% uncovered by the previous works, in which allocative inefficiency plays a more important role than technical inefficiency. Furthermore, the cost of misallocated labor input alone constitutes more than 80% of total allocative inefficiency. Financial deregulation starting from 1991 in Taiwan appears to have improved economic efficiency of the banking industry.     

The Productivity Effects of Internal and External R&D: Evidence from a Dynamic Panel Data Model*

We examine the impact of internal and external R&D on labour productivity in a 6‐year panel of Dutch manufacturing firms. We apply a dynamic panel data model that allows for decreasing or increasing returns to scale in internal and external R&D and for economies of scope. We find complementarity between internal and external R&D, with a positive impact of external R&D only evident in case of sufficient internal R&D. These findings confirm the role of internal R&D in enhancing absorptive capacity. The scope economies are accompanied by decreasing returns to scale at high levels of internal and external R&D. The analysis indicates that productivity grows by increasing the share of external R&D in total R&D.     

Revisiting the decomposition of cost efficiency for non-homothetic technologies: a directional distance function approach

In the early 1980’s Kopp and Diewert proposed a popular method to decompose cost efficiency into allocative and technical efficiency for parametric functional forms based on the radial approach initiated by Farrell. We show that, relying on recently proposed homogeneity and duality results, their approach is unnecessary for self-dual homothetic production functions, while it is inconsistent in the non-homothetic case. By stressing that for homothetic technologies the radial distance function can be correctly interpreted as a technical efficiency measure, since allocative efficiency is independent of the output level and radial input reductions leave it unchanged, we contend that for non-homothetic technologies this is not the case because optimal input demands depend on the output targeted by the firm, as does the inequality between marginal rates of substitution and market prices—allocative inefficiency. We demonstrate that a correct definition of technical efficiency corresponds to the directional distance function because its flexibility ensures that allocative efficiency is kept unchanged through movements in the input production possibility set when solving technical inefficiency, and therefore the associated cost reductions can be solely—and rightly—ascribed to technical-engineering-improvements. The new methodology allowing for a consistent decomposition of cost inefficiency is illustrated resorting to simple examples of non-homothetic production functions.     

Costs, Institutional Mobility Barriers, and Market Structure: Advertising Agencies as Multiproduct Firms

What accounts for the diversity and limited concentration that has long characterized the organization of the advertising agency industry? This question is addressed by treating an advertising agency as a multiproduct firm. The firm's product line or service mix is defined in terms of the set of different media categories where an agency places the advertising messages that it creates on behalf of its clients. Evidence is presented indicating that the structure of demand and costs in the advertising agency industry conforms to the conditions that MacDonald and Slivinski showed were required for an industry to sustain an equilibrium with diversified firms. Building on this framework, we formulate a set of three hypotheses relating to the realization of product-specific scale and scope economies. The first two hypotheses posit that given low fixed costs and minimal entry barriers, both media-specific scale and scope economies are available and can be exploited by relatively small-size agencies. The third hypothesis suggests that large agencies may experience diseconomies of scope as a consequence of excessive diversification induced by two pervasive industry institutional phenomena: (1) “bundling” of agency services to match client demand for a mix of media advertising, and (2) “conflict policy,” which prohibits an agency from serving competing accounts and operates as a mobility constraint. Utilizing a multiproduct cost function, we estimate media-specific scale and scope economies for a cross section of 401 U.S. agencies in 1987. The results obtained support the set of three hypotheses outlined above. The paper concludes with a discussion of the implications of these findings for the restructuring currently underway in this industry.     

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.     

Prices and factor demand in an endogenized input–output model

This paper combines factor demand functions (for intermediate input and labour) and price equations (derived from a Generalized Leontief cost function) with the traditional input–output price model. The cost functions determine factor demands for materials and labour as well as output prices at given input prices. At the second level of aggregation, the intermediate demand as a single input is split proportional to the elements in the column of the technical coefficients matrix. The emphasis in this endogenization of technical coefficients is on two features. First, the repercussion of output on input prices, and, second, the link between the econometric model for the supply side and the input–output demand model.