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Estimating economies of scale and scope with flexible technology

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Abstract

Economies of scope are typically modelled and estimated using a cost function that is common to all firms in an industry irrespective of their type, e.g. whether they specialize in a single output or produce multiple outputs. Instead, we estimate a flexible technology model that allows for type-specific technologies and show how it can be estimated using linear parametric forms including the translog. A common technology remains a special case of our model and is testable econometrically. Our sample, of publicly owned US electric utilities, does not support a common technology for integrated and specialized firms. Our empirical results therefore suggest that assuming a common technology might bias estimates of economies of scale and scope. Thus, how we model the production technology clearly influences the policy conclusions we draw from its characteristics.

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Notes

  1. Duality theory allows us to estimate the underlying production technology via a cost function. Duality theory and the implied restrictions on the cost function ensure that the latter does not violate the physics of production. For an introduction see the survey by Fuss and McFadden (1978).

  2. A related literature that uses nonparametric estimators (Charnes et al. 1978) to measure economies of scope always uses models that allow for different technologies across firm types and emphasizes that it is these differences that underlie economies of scope (Färe 1986).

  3. For notational convenience and ease of exposition, we do not index input prices by utility type.

  4. Although we are using notations y U and y D these can be generically labeled as y 1 and y 2 so that y U and y D for the integrated firm are nothing but y 1 and y 2.

  5. We thank an anonymous referee for making this point.

  6. In the interest of brevity, we do not report the coefficient estimates for the models that define the distribution output as power delivered. They are available upon request. In any case, Table 4 below shows the scale and scopes estimates for both distribution output specifications.

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Acknowledgments

We would like to thank the participants of the 39th EARIE conference in Rome for their helpful comments. The usual disclaimer applies. Pablo Arocena and David Saal acknowledge financial support from the Spanish Ministry of Economy and Competitiveness (project ECO2010-21242-C03-03).

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Authors and Affiliations

  1. Ifo Institute, Leibniz Institute for Economic Research, University of Munich, Poschingerstrasse 5, 81679, Munich, Germany

    Thomas P. Triebs

  2. Loughborough University, Loughborough, UK

    David S. Saal

  3. Universidad Pública de Navarra, Pamplona, Spain

    Pablo Arocena

  4. State University of New York at Binghamton, Binghamton, NY, USA

    Subal C. Kumbhakar

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  1. Thomas P. Triebs
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  2. David S. Saal
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  3. Pablo Arocena
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  4. Subal C. Kumbhakar
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Correspondence to Thomas P. Triebs.

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Triebs, T.P., Saal, D.S., Arocena, P. et al. Estimating economies of scale and scope with flexible technology. J Prod Anal 45, 173–186 (2016). https://doi.org/10.1007/s11123-016-0467-1

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  • DOI: https://doi.org/10.1007/s11123-016-0467-1

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