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Estimating economies of scale and scope with flexible technology

Author

Listed:
  • Triebs, Thomas P.
  • Saal, David S.
  • Arocena, Pablo
  • Kumbhakar, Subal C.

Abstract

Economies of scope are typically modelled and estimated using a cost function that is common to all firms in an industry irrespective of their type, e.g. whether they specialize in a single output or produce multiple outputs. Instead, we estimate a flexible technology model that allows for type-specific technologies and show how it can be estimated using linear parametric forms including the translog. A common technology remains a special case of our model and is testable econometrically. Our sample, of publicly owned US electric utilities, does not support a common technology for integrated and specialized firms. Our empirical results therefore suggest that assuming a common technology might bias estimates of economies of scale and scope. Thus, how we model the production technology clearly influences the policy conclusions we draw from its characteristics.

Suggested Citation

  • Triebs, Thomas P. & Saal, David S. & Arocena, Pablo & Kumbhakar, Subal C., 2016. "Estimating economies of scale and scope with flexible technology," Munich Reprints in Economics 43531, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:43531
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    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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