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Network diseconomies and optimal structure

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  • Sherrill Shaffer

Abstract

This paper explores the effect on costs when firms within an industry must interact with each other in the normal course of business. Such interaction will generally cause the socially optimal scale of each firm to deviate from its minimum average cost scale. In addition, the socially optimal industry structure may be more concentrated than conventional firm-level cost studies would suggest and may also differ from the unregulated (free-entry) equilibrium structure. These concepts, while potentially applicable to several industries, are here made more precise for the banking industry, both theoretically and empirically.

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File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/1997/wp97-19.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 97-19.

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Date of creation: 1997
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Handle: RePEc:fip:fedpwp:97-19

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Related research

Keywords: Bank mergers ; Economies of scale ; Theory of the firm;

References

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  1. Nicholas Economides, 1995. "The Economics of Networks," Working Papers 94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
  2. Allen N. Berger & David B. Humphrey, 1992. "Megamergers in banking and the use of cost efficiency as an antitrust defense," Finance and Economics Discussion Series 203, Board of Governors of the Federal Reserve System (U.S.).
  3. Barnett, William A & Lee, Yul W, 1985. "The Global Properties of the Miniflex Laurent, Generalized Leontief, and Translog Flexible Functional Forms," Econometrica, Econometric Society, vol. 53(6), pages 1421-37, November.
  4. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  5. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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  7. Paul Milgrom and John Roberts., 1987. "Bargaining and Influence Costs and the Organization of Economic Activity," Economics Working Papers 8731, University of California at Berkeley.
  8. Sherrill Shaffer, 1988. "A revenue-restricted cost study of 100 large banks," Research Paper 8806, Federal Reserve Bank of New York.
  9. G. S. Maddala, 1987. "Limited Dependent Variable Models Using Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 307-338.
  10. Calem, Paul S. & Carlino, Gerald A., 1991. "Urban agglomeration economies in the presence of technical change," Journal of Urban Economics, Elsevier, vol. 29(1), pages 82-95, January.
  11. White, Halbert, 1980. "Using Least Squares to Approximate Unknown Regression Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 149-70, February.
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  13. Gilligan, Thomas & Smirlock, Michael & Marshall, William, 1984. "Scale and scope economies in the multi-product banking firm," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 393-405, May.
  14. Mishkin, Frederic S., 1990. "Does correcting for heteroscedasticity help?," Economics Letters, Elsevier, vol. 34(4), pages 351-356, December.
  15. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
  16. Jackson, William E, III, 1992. "Is the Market Well Defined in Bank Merger and Acquisition Analysis?," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 655-61, November.
  17. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  18. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245.
  19. Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-80, October.
  20. Douglas W. Caves & Laurits R. Christensen & Michael W. Tretheway, 1984. "Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Costs Differ," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 471-489, Winter.
  21. Kim, Moshe & Ben-Zion, Uri, 1989. "The Structure of Technology in a Multioutput Branch Banking Firm," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(4), pages 489-96, October.
  22. 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.).
  23. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
  24. Trond E. Olsen, 1996. "Agency Costs and the Limits of Integration," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 479-501, Autumn.
  25. Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-66, September.
  26. James McAndrews & William Roberds, 1997. "A model of check exchange," Working Papers 97-16, Federal Reserve Bank of Philadelphia.
  27. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April.
  28. Leonard I. Nakamura, 1993. "Loan screening within and outside of customer relationships," Working Papers 93-15, Federal Reserve Bank of Philadelphia.
  29. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 38-50.
  30. William R. Emmons, 1993. "Increased risk-taking versus local economic conditions as causes of bank failures," Proceedings 408, Federal Reserve Bank of Chicago.
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