MULTI-PRODUCT COST ATTRIBUTES: A STUDY OF U.K. BUILDING SOCIETIES

Abstract

A translog multi-product cost function is estimated jointly with a derived input cost share equation to obtain estimates of overall economies of scale and 'augmented' overall economies of scale for the United Kingdom building society industry. The 'augmented' measure takes into account induced changes in the number of building society branch offices as the outputs vary. The parameter estimates are then used to compute the derivatives of the marginal costs of each product to test for product-specific economies of scale and economies of scope. THE main structural developments in the building society industry in recent years have been: the relatively rapid growth of both the industry and individual societies; a marked decline in the number of societies; and an increasing degree of market concentration. These developments have led to speculation concerning the existence of economies of scale and economies of scope in the industry. In this paper, multi-product statistical cost analysis is employed to investigate scale and scope economies in an attempt to gain some insight into the implications of further growth and diversification in the industry. To this end, a model is developed in which building societies are treated as suppliers of one type of financial service to borrowers (mainly mortgage borrowers) and another type of financial service to lenders (mainly personal sector savers). There have been no previous statistical studies of building society costs in