Computing Economies of Scope Using Robust Partial Frontier Nonparametric Methods

Pedro Carvalho,Rui Cunha Marques

doi:10.3390/w8030082

Pedro Carvalho, Rui Cunha Marques

Open Access

https://doi.org/10.3390/w8030082

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Abstract

This paper proposes a methodology to examine economies of scope using the recent order-α nonparametric method. It allows us to investigate economies of scope by comparing the efficient order-α frontiers of firms that produce two or more goods with the efficient order-α frontiers of firms that produce only one good. To accomplish this, and because the order-α frontiers are irregular, we suggest to linearize them by the DEA estimator. The proposed methodology uses partial frontier nonparametric methods that are more robust than the traditional full frontier methods. By using a sample of 67 Portuguese water utilities for the period 2002–2008 and, also, a simulated sample, we prove the usefulness of the approach adopted and show that if only the full frontier methods were used, they would lead to different results. We found evidence of economies of scope in the provision of water supply and wastewater services simultaneously by water utilities in Portugal.

Highlights

The existence of inadequate incentives in monopolistic markets jeopardizes the maximization of the organizations’ efficiency and reduces the value for money [1]
This paper investigates the use of nonparametric methodologies to estimate the existence of economies of scope, proposing a methodology based on partial frontier methods
These methods are more robust than the full frontier methods, mainly because the partial frontier methods are less sensitive to extreme data and outliers and do not face the problem of the “curse of dimensionality”

Summary

Introduction

The existence of inadequate incentives in monopolistic markets jeopardizes the maximization of the organizations’ efficiency and reduces the value for money [1]. Economies of scope exist when the costs of producing two or more goods together by the same entity are lower than the costs of producing them separately by several entities [2]. Economies of scope are related to savings from the joint production of different goods [3], for example, due to the sharing of fixed costs [4]. The results found in the literature are very different concerning the existence or non-existence of economies of scope (see, for instance, in the water sector [5]). Two types of economies of scope have been investigated: vertical integration of various stages in the production chain, for example, from production to distribution; and the integration of different activities, such as electricity, water, wastewater, and gas supply services.

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Conclusion