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Scale and Scope Economies in the Global Advertising and Marketing Services Business

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  • Alvin J. Silk
  • Ernst R. Berndt
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    Abstract

    We assess size and scope-related economies in the global advertising and marketing services business. A translog cost function is employed wherein a firm's costs vary according to its scale and two dimensions of the scope of its operations. Parameters of the model are estimated via three stage least squares using annual data for 1989-2001 for an unbalanced panel consisting of the eight largest firms in this industry. A firm's total variable costs are affected by its scale, scope (mix of services and markets served), and by the interaction of the two dimensions of scope. The latter effect suggests that economies of coordination may accompany the strategy of jointly offering advertising and marketing services globally. Estimates indicate that the industry's long-run cost function is subject to very slight economies of scale. Diseconomies of scale accompany growth in volume obtained by extending either breadth of service offerings or market coverage. A small cost advantage, typically of one to two percent, is uniformly associated with joint production of services for the domestic and overseas markets, as compared to splitting up the firm into smaller stand-alone entities. Scope economies of a similar magnitude arise consistently from the joint production of advertising and marketing services.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9965.

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    Date of creation: Sep 2003
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    Handle: RePEc:nbr:nberwo:9965

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    1. MacDonald, Glenn M & Slivinski, Alan, 1987. "The Simple Analytics of Competitive Equilibrium with Multiproduct Firms," American Economic Review, American Economic Association, vol. 77(5), pages 941-53, December.
    2. Schmalensee, Richard. & Silk, Alvin J. & Bojanek, Robert., 1981. "The impact of scale and media mix on advertising agency costs," Working papers 1269-81., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Alvin J. Silk & Ernst R. Berndt, 1993. "Scale and Scope Effects on Advertising Agency Costs," Marketing Science, INFORMS, vol. 12(1), pages 53-72.
    4. Bailey, Elizabeth E & Friedlaender, Ann F, 1982. "Market Structure and Multiproduct Industries," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 1024-48, September.
    5. Schmidt, Peter, 1978. "A note on the estimation of seemingly unrelated regression systems," Journal of Econometrics, Elsevier, vol. 7(2), pages 259-261, June.
    6. Caves, R E & Porter, M E, 1977. "From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition," The Quarterly Journal of Economics, MIT Press, vol. 91(2), pages 241-61, May.
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    Cited by:
    1. Kox, Henk L.M. & Leeuwen, George van & Wiel, Henry van der, 2010. "Competitive, but too small - productivity and entry-exit determinants in European business services," MPRA Paper 24389, University Library of Munich, Germany.

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