Estimating Economies of Scale and Scope with Flexible Technology
AbstractEconomies of scale and scope are typically modelled and estimated using cost functions that are common to all firms in an industry irrespective of whether they specialize in a single output or produce multiple outputs. We suggest an alternative flexible technology model that does not make this assumption and show how it can be estimated using standard parametric functions including the translog. The assumption of common technology is a special case of our model and is testable econometrically. Our application is for publicly owned US electric utilities. In our sample, we find evidence of economies of scale and vertical economies of scope. But the results do not support a common technology for integrated and specialized firms. In particular, our empirical results suggest that restricting the technology might result in biased estimates of economies ofscale and scope.
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Bibliographic InfoPaper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 142.
Date of creation: 2012
Date of revision:
Economies of scale and scope; flexible technology; electric utilities; vertical integration; translog cost function;
Find related papers by JEL classification:
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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