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Estimating economies of scale and scope with flexible technology

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  • 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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    11. Maria Molinos-Senante & Alexandros Maziotis, 2021. "Productivity growth, economies of scale and scope in the water and sewerage industry: The Chilean case," PLOS ONE, Public Library of Science, vol. 16(5), pages 1-16, May.
    12. Badunenko, Oleg & Kumbhakar, Subal C., 2017. "Economies of scale, technical change and persistent and time-varying cost efficiency in Indian banking: Do ownership, regulation and heterogeneity matter?," European Journal of Operational Research, Elsevier, vol. 260(2), pages 789-803.
    13. Byoung-Kuk Ju & Seung-Hoon Yoo & Chulwoo Baek, 2022. "Economies of Scale in City Gas Sector in Seoul, South Korea: Evidence from an Empirical Investigation," Sustainability, MDPI, vol. 14(9), pages 1-14, April.
    14. Mydland, Ørjan & Kumbhakar, Subal C. & Lien, Gudbrand & Amundsveen, Roar & Kvile, Hilde Marit, 2020. "Economies of scope and scale in the Norwegian electricity industry," Economic Modelling, Elsevier, vol. 88(C), pages 39-46.
    15. Gugler, Klaus & Liebensteiner, Mario, 2019. "Productivity growth and incentive regulation in Austria's gas distribution," Energy Policy, Elsevier, vol. 134(C).
    16. Philipp Steinbrunner, 2023. "I want a quiet life! On productivity and competition in the Central European energy sector," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(2), pages 403-428, April.
    17. Danelon, André Felipe & Augusto, Fernanda Gaudio & Spolador, Humberto Francisco Silva, 2021. "Water resource quality effects on water treatment costs: An analysis for the Brazilian case," Ecological Economics, Elsevier, vol. 188(C).
    18. Alem, Habtamu1 & Lien, Gudbrand1 & Kumbhakar, Subal C1 & Hardaker, J. Brian, 2017. "Economies Of Scale And Scope In The Norwegian Agriculture," 2017 International Congress, August 28-September 1, 2017, Parma, Italy 260907, European Association of Agricultural Economists.
    19. Maximilian Koppenberg, 2023. "Markups, organic agriculture and downstream concentration at the example of European dairy farmers," Agricultural Economics, International Association of Agricultural Economists, vol. 54(2), pages 161-178, March.
    20. Danelon, André F. & Kumbhakar, Subal C., 2023. "Estimating COVID-19 under-reporting through stochastic frontier analysis and official statistics: A case study of São Paulo State, Brazil," Socio-Economic Planning Sciences, Elsevier, vol. 90(C).
    21. Stefan Seifert, 2016. "Semi-Parametric Measures of Scale Characteristics of German Natural Gas-Fired Electricity Generation," Discussion Papers of DIW Berlin 1571, DIW Berlin, German Institute for Economic Research.
    22. Wimmer, Stefan G. & Sauer, Johannes, 2017. "The Economic Benefits of Farm Diversification: An Empirical Analysis of Economies of Scope Using the Dual Approach," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258465, Agricultural and Applied Economics Association.

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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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