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Testing the Multiproduct Hypothesis on Norwegian Aluminium Industry Plants

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Abstract

Although most production activities involve multiple outputs, econometric models of production or cost functions normally involve only one single homogeneous output. The aim of this paper is to test the hypothesis that a multiproduct specification is superior to a model with a single homogenous product. To do this, we use a Multiproduct Symmetric Generalized McFadden (MSGM) cost function. This functional form is globally concave and flexible in the sense that it provides a second order differentiable approximation of any arbitrary cost function which is twice continuously differentiable and linear homogenous in input prices. In an empirical application on a panel data from ten Norwegian primary aluminium plants, we find support for our hypothesis. We present estimates of price elasticities, returns to scale and scope, and product specific demand elasticities. Our results indicate economies of scope, i.e. it is more profitable to produce more than one output, and show sensitivity of factor demand when the product mix changes.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 350.

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Date of creation: May 2003
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Handle: RePEc:ssb:dispap:350

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Keywords: Cost function; Multiple output; Global concavity; Returns to scale; Economies of scope; Price elasticity; Output elasticity; Panel data; Primary aluminium industry;

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References

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  1. Kumbhakar, Subal C, 1989. "Estimation of Technical Efficiency Using Flexible Functional Form and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(2), pages 253-58, April.
  2. W. Erwin Diewert & T.J. Wales, 1989. "Flexible Functional Forms and Global Curvature Conditions," NBER Technical Working Papers 0040, National Bureau of Economic Research, Inc.
  3. Godfrey, Leslie G, 1978. "Testing for Higher Order Serial Correlation in Regression Equations When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1303-10, November.
  4. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  5. 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.
  6. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
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Cited by:
  1. Kenneth Stewart, 2009. "Non-jointness and scope economies in the multiproduct symmetric generalized McFadden cost function," Journal of Productivity Analysis, Springer, vol. 32(3), pages 161-171, December.
  2. Blomberg, Jerry & Söderholm, Patrik, 2011. "Factor demand flexibility in the primary aluminium industry: Evidence from stagnating and expanding regions," Resources Policy, Elsevier, vol. 36(3), pages 238-248, September.
  3. Jerry Blomberg & Bo Jonsson, 2011. "Evaluating the efficiency of the global primary aluminum smelting industry: a data envelopment approach," Mineral Economics, Springer, vol. 24(1), pages 29-44, July.

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