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Economies of diversification: A generalization and decomposition of economies of scope

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  • Chavas, Jean-Paul
  • Kim, Kwansoo

Abstract

The paper investigates the benefits of diversification for a multi-product firm. It examines economies of diversification, reflecting the cost reduction associated with producing outputs in an integrated firm (compared to specialized firms). The analysis applies under complete specialization as well as partial specialization (when firms are not fully specialized and/or when the specialization scheme does not cover all outputs). It decomposes economies of diversification into four additive parts: a part measuring complementarity among outputs; a part reflecting economies of scale; a part reflecting convexity; and a part reflecting the role of fixed cost. This new decomposition appears useful in investigating how scale effects, complementarity effects, and convexity effects can contribute to economies of scope in a multiproduct firm and helps generate valuable insights into the economics of specialization for multiproduct firms.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 126 (2010)
Issue (Month): 2 (August)
Pages: 229-235

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Handle: RePEc:eee:proeco:v:126:y:2010:i:2:p:229-235

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Web page: http://www.elsevier.com/locate/ijpe

Related research

Keywords: Diversification Specialization Scope Complementarity Scale Fixed cost;

References

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  1. Michel Dietsch, 1993. "Economies of scale and scope in French commercial banking industry," Journal of Productivity Analysis, Springer, vol. 4(1), pages 35-50, June.
  2. Chavas, Jean-Paul & Aliber, Michael, 1993. "An Analysis Of Economic Efficiency In Agriculture: A Nonparametric Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
  3. Ian E. Gorman, 1985. "Conditions for Economies of Scope in the Presence of Fixed Costs," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 431-436, Autumn.
  4. Antonelli, Cristiano, 1993. "Externalities and complementarities in telecommunications dynamics," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 437-447, September.
  5. Desruelle, Dominique & Gaudet, Gerard & Richelle, Yves, 1996. "Complementarity, coordination and compatibility: The role of fixed costs in the economics of systems," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 747-768, October.
  6. Cohn, Elchanan & Rhine, Sherrie L W & Santos, Maria C, 1989. "Institutions of Higher Education as Multi-product Firms: Economies of Scale and Scope," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 284-90, May.
  7. Jean-Paul Chavas & Kwansoo Kim, 2007. "Measurement and Sources of Economies of Scope: A Primal Approach," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, T├╝bingen, vol. 163(3), pages 411-427, September.
  8. Ferrier, Gary D. & Grosskopf, Shawna & Hayes, Kathy J. & Yaisawarng, Suthathip, 1993. "Economies of diversification in the banking industry : A frontier approach," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 229-249, April.
  9. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June.
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  11. Serge Garcia & Alban Thomas, 2001. "The Structure of Municipal Water Supply Costs: Application to a Panel of French Local Communities," Journal of Productivity Analysis, Springer, vol. 16(1), pages 5-29, July.
  12. Anbarci, Nejat & Lemke, Robert & Roy, Santanu, 2002. "Inter-firm complementarities in R&D: a re-examination of the relative performance of joint ventures," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 191-213, February.
  13. Tai-Hsin Huang & Mei-Hui Wang, 2001. "Measuring scale and scope economies in multiproduct banking? A stochastic frontier cost function approach," Applied Economics Letters, Taylor & Francis Journals, vol. 8(3), pages 159-162.
  14. Panzar, John C & Willig, Robert D, 1981. "Economies of Scope," American Economic Review, American Economic Association, vol. 71(2), pages 268-72, May.
  15. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-97, May.
  16. Arora, Ashish & Gambardella, Alfonso, 1990. "Complementarity and External Linkages: The Strategies of the Large Firms in Biotechnology," Journal of Industrial Economics, Wiley Blackwell, vol. 38(4), pages 361-79, June.
  17. Bloch, Harry & Madden, Gary G & Savage, Scott J, 2001. "Economies of scale and scope in Australian telecommunications," MPRA Paper 11154, University Library of Munich, Germany.
  18. Allen N. Berger & Gerald A. Hanweck & David B. Humphrey, 1986. "Competitive viability in banking: scale, scope, and product mix economies," Research Papers in Banking and Financial Economics 82, Board of Governors of the Federal Reserve System (U.S.).
  19. Leleu, Herve, 2006. "A linear programming framework for free disposal hull technologies and cost functions: Primal and dual models," European Journal of Operational Research, Elsevier, vol. 168(2), pages 340-344, January.
  20. Wilson, Wesley W. & Zhou, Yimin, 2001. "Telecommunications deregulation and subadditive costs: Are local telephone monopolies unnatural?," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 909-930, May.
  21. Baumol, William J, 1977. "On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry," American Economic Review, American Economic Association, vol. 67(5), pages 809-22, December.
  22. de Groot, Hans & McMahon, Walter W & Volkwein, J Fredericks, 1991. "The Cost Structure of American Research Universities," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 424-31, August.
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Citations

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Cited by:
  1. Hess, Sebastian, 2011. "Outsourcing Decisions Of Pig Producers In Baden-W├╝rttemberg," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114509, German Association of Agricultural Economists (GEWISOLA).
  2. Hess, Sebastian, 2011. "Outsourcing, Regional Trade and Specialization: An Application to in the German Pig Sector," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114537, European Association of Agricultural Economists.
  3. Renner, Swetlana & Glauben, Thomas & Hockmann, Heinrich, 2012. "Measurement And Decomposition Of Flexibility Of Multi-Output Firms," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 124865, International Association of Agricultural Economists.
  4. Brandon Pope & Andrew Johnson, 2013. "Returns to scope: a metric for production synergies demonstrated for hospital production," Journal of Productivity Analysis, Springer, vol. 40(2), pages 239-250, October.

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