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.     

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.     

Scale and scope economies of Japanese private universities revisited with an input distance function approach

This paper examines the scale and scope economies of higher education institutions in Japan assuming the presence of productive inefficiency. The standard approach to testing the scope economies is to apply the cost function. However, the cost function approach often entails the difficulty of obtaining reliable data on input prices, especially the input prices of capital for higher education institutions. This paper proposes a duality approach based on the input distance function. The scope economies are tested under a necessary and sufficient condition by retrieving the costs of joint and separate production from the input distance function. We apply the testing procedure to data pertaining to 218 Japanese private universities in 1999 and 2004. The results indicate the scale economies and the scope diseconomies.     

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。     

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.     

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.     

Efficiency in Third Sector Partnerships for Delivering Local Government Services: The role of economies of scale,scope and learning

Abstract

Third sector partnerships are under pressure to change in the light of the increasing cost pressures on local public services. The literature throws doubt on the level of economies of scale and suggests that more attention should be given to economies of scope and learning. The common conflation of economies of size with economies of scale has led policymakers to overemphasize larger scale providers and has distorted the strategies which third sector organizations have adopted, pushing them towards mergers and consortia based on scale.     

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.     

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.     

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.     

Analysis of Hospital Production: An Output Index Approach

In this study, we develop and implement an output index approach to the estimation of hospital cost functions that reflects the differentiated nature of hospital care. The approach combines the estimation of an output index within a flexible functional form. We find, in an application to California hospitals, evidence of scope economies across specialties within primary care, and diseconomies of scope within secondary and tertiary care. Minimum efficient scale is reached at larger levels of output than would be estimated by conventional techniques. These results indicate the importance of accounting for firm output heterogeneity when estimating cost functions. Copyright © 2014 John Wiley & Sons, Ltd.     

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.     

Economies of scale and scope in water supply

This study examines the multiproduct nature of water supply relative to economies of scale and scope. The water utility is viewed as a multiproduct firm providing residential and non- residential services with spatial variation. There are no significant economies of scale in the utility's overall operation. The utility, however, enjoys considerable economies for non- residential water supply but suffers from diseconomies in residential supply. The economies of scale achieved in water treatment are mostly lost in the distribution of water. The utility on the whole experiences economies of scope associated with joint production of the two services. Furthermore, water utilities have no perceptible tendency to behave as a natural monopoly.     

The Structure of Municipal Water Supply Costs: Application to a Panel of French Local Communities

Network losses and returns are importantissues for water resource management, that are addressed in thispaper by modeling the structure of production for municipal waterutilities with two outputs: water sold to final customers andwater network losses. We propose a measure of economies of scopeto assess the benefit associated with joint production of waterfor final customers and water losses, and several measures ofreturns to evaluate potential gains in exploiting technologicalflexibility of water networks. We estimate the cost structureof water utilities using a GMM procedure with a Translog costfunction and panel data. Estimation results reveal a positivedegree of economies of scope, and short-run returns to productiondensity and returns to customer density that are not significantlydifferent from 1. Significant economies of scale indicate thatlocal communities may benefit from merging into water districts.     

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.     

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.     

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.     

Factor substitution in the production of library services: evidence from the North American research libraries

Economic analysis provides a rigorous foundation for the investigation of production activity, but relatively little attention has been given to service activities. This paper examines the technology of library services. Previous studies of library economics have focused mainly on economies of scale. The model proposed identifies scale economies, together with the substitution relationships among three categories of library staff, which are inferred from estimates of the cost function of 92 research libraries. For all categories of employees there is evidence of substitutability, but the demand for librarians is inelastic and the substitution possibilities weak. Student assistants are relatively strong substitutes for support staff and to a limited degree may be substituted for trained librarians. Copyright © 2006 John Wiley & Sons, Ltd.     

FLEXIBLE COST FUNCTION ESTIMATES FOR A GAS AND FUEL CORPORATION IN AUSTRALIA

This paper reviews and empirically tests the available evidence concerning economies of scale and technological change at Australian Gas Limited of New South Wales (AGL). a gas and fuel corporation. Since energy corporations are considered to need scale economies, they are regulated 'n both developed and developing countries. In keeping with the trend of deregulation stemming from the beginning of the 1980s in Western countries, many kinds of public corporations have been privatized and deregulated. Energy corporations are not an exceptional case, but very little evidence on this industry has been reported so far. From empirical tests, it is shown in a trans-log-type cost function that AGL has scale economies. the degree of which increased after the corporation changed its energy source from coal oil to liquid natural gas. Moreover, from the results of the trans-log cost function including technological change, a Hicksian neutral type technical progress exists. In a Hicksian non-neutral type, stock-intensive technical progress exists. while labor productivity deterioates. Energy productivity is not significant.