The Construction Industry and (Dis)Economies of Scope: Empirical Research in the Hokkaido Procurement Auction

Abstract

This paper explores the presence, causes, and effects of economies of scope in the construction industry. Based on public procurement data of the Hokkaido Regional Development Bureau from fiscal years 2006 to 2012, it is clear that the cost efficiency of bid and win rates are regressed by different factors, including the number of segments in public procurement in which a construction business operates. We found that the bid rates of diversified firms are higher than those of specialised firms. Therefore, the probability of a firm to win a bid decreases as their number of operational segments increases. Diseconomies of scope in the construction industry stem from the degree of specialisation of each segmentation, which is tested in this study by a regression analysis between the average bid rate of each business and the number of bids. The results show that costs are reduced for jobs that receive many bids, especially from firms participating in few segments.