Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods

So far, in the nonparametric literature only full frontier nonparametric methods have been applied to search for economies of scope and scale, particularly the data envelopment analysis method (DEA). However, these methods present some drawbacks that might lead to biased results. This paper proposes a methodology based on more robust partial frontier nonparametric methods to look for scope and scale economies. Through this methodology it is possible to assess the robustness of these economies, and in particular to assess the influence that extreme data or outliers might have on them. The influence of the imposition of convexity on the production set of firms was also investigated. This methodology was applied to the water utilities that operated in Portugal between 2002 and 2008. There is evidence of economies of vertical integration and economies of scale in drinking water supply utilities and in water and wastewater utilities operating mainly in the retail segment. Economies of scale were found in water and wastewater utilities operating exclusively in the wholesale, and in some of these utilities diseconomies of scope were also found. The proposed methodology also allowed us to conclude that the existence of some smaller utilities makes the minimum optimal scales go down.