Changes in the productive efficiency of U.S. flour mills in the late nineteenth century: an input-distance-function approach

The productive efficiency of the U.S. flour milling industry increased substantially between 1850 and 1880. Specifically, a typical flour mill in 1880 was able to produce the same value of output as a mill in 1850 with 25 percent fewer factor inputs. We use the concept of the cone technology, combined with an input-distance-function approach, to decompose this increase in productive efficiency into changes in technical efficiency, technological progress, and changes in scale efficiency, assuming unchanged allocative efficiency in combining inputs. We find that the average technical efficiency of flour mills was essentially constant throughout the period, implying that almost all the gains in productive efficiency were due to improvements in scale efficiency occasioned by more fully exploiting increasing returns. Furthermore, productive efficiency was positively related to mill size as larger mills were better able to take advantage of both economies of scale and technological progress. These results provide evidence in support of an important role for the increased scale of production in providing the preconditions for the emergence in the early twentieth century of an oligopolistic market structure in the U.S. flour milling industry.