Yardstick Cost Comparison and Economies of Scale and Scope in Japan's Electric Power Industry

Abstract

This paper utilizes a fixed‐effects model of panel data analysis and estimates the translog cost function of the Japanese electric power industry from 1978 to 1998. First, we investigate whether the Japanese electric power industry is naturally monopolistic. We find that all electric power companies still benefit from both scale and scope economies and therefore, this industry remains a naturally mono‐polistic industry. Second, in order to apply the idea of yardstick‐type competition to a naturally monopolistic industry where costs are quite different between companies, we introduce two kinds of cost‐comparison coefficients, one for the individually specific effects and the other for scale and scope economies.