Economies Of Scale Costs Research Articles

The economic advantages of chain organization

AbstractThis article considers the rapid spread of chain firms in many industries. The conventional explanation is that chains generate economies of scale in costs. Alternatively, the structure of chains may enhance demand by helping firms develop reputations, among other reasons. I quantify the value of these explanations empirically with a large, detailed data set on the hotel industry, combining a reduced‐form analysis of revenues with a structural estimation of firm costs. Revenue analysis shows substantial evidence of a large chain premium. Cost estimation shows that after accounting for unobserved heterogeneity, chain‐affiliated firms receive no cost advantage relative to independent firms.

Giving Away to Increase Profits? Price-Discrimination and the Effect of Free Goods

This paper considers the single-period pricing problem of a monopolist serving consumers with private, heterogeneous willingness to pay for quality. A standard approach is to model as an adverse selection problem. Motivated by empirical evidence that consumer utility becomes discontinuous when service is free (e.g. “zero-price transaction utility”), we examine situations where giving away service increases profit. We find that free service increases profit when (i) the transaction utility from free service is high, and (ii) the adverse selection pricing schedule results in a small margin for low-valuation customers. When these conditions are met, a pricing policy that serves some consumers for free generates higher profit, even in the absence of volume-dependent cost. When a provider benefits from economies of scale in cost and endogenously selects its target market, free service still increases profit when (i) and (ii) hold. To prove this result, we generalize the adverse selection model to allow for volume-dependent cost.

A conceptual framework for evaluating the most cost-effective intervention along the supply chain to improve food safety

This paper develops a conceptual framework for choosing the most cost-effective intervention along the supply chain to improve food safety. This framework identifies both the initial level of on-farm infection and the potential for new infection post farm-gate as key parameters influencing the relative effectiveness of on-farm and abattoir interventions. In addition, the potential for cost economies of scale in implementing interventions at abattoir compared to on-farm is shown to be a further factor determining the relative cost-effectiveness of these interventions. Overall, it is suggested by the analysis in this paper that successful abattoir interventions will typically be more cost-effective than successful on-farm interventions. These findings are consistent with existing case study evidence.

The buy-out/property right share choice in film financing: Financial rationing, adverse selection and the bayesian dilemma

Reduced state support of film financing in Europe requires the creation of an efficient market of private cinema financiers. Principal-agent models with and without common consent over film risk show that the two main problems of film financing (high risk and lack of collateral for the borrower) may be solved if the financier achieves economies of scale in costs of capital and is efficient in information gathering. Conversely, the pathology of a market with “inefficient financiers” includes: film financial rationing, adverse selection, and refusal of financial support to otherwise profitable film projects. From the normative point of view, the creation of efficient financiers would be fostered by institutional changes that promote market thickening and “risk spreading” (the case of the USA) instead of simple forms of “risk shifting” (the case of Italy).

Bertrand oligopoly in a spatial context: The case of quantity independent transportation costs

The theory of spatial competition [for a review, see Gabszewicz and Thisse (1985)] is usually based on the assumption of transportation costs which are proportionate to distance and quantity. In reality, however, there exist frequently considerable economies of scale, especially with respect to the conveyed quantity of goods. A good case in point is transportation cost incurred by a consumer patronizing a shopping area. Cost economies of scale will in general influence consumers' optimal choice with respect to quantities and best market places. In the extreme, consumers' outlays on transportation can be considered independent of the purchased quantity, but approximately proportionate to distance. In the present paper, the impact of this assumption on spatial competition is analysed. It will be shown, that existence and uniqueness of spatial oligopolistic equilibrium is restored. Furthermore, due to some residual monopolistic power, prices do not converge to the perfectly competitive equilibrium prices when the distance between the firms shrinks to zero. In conclusion the model exhibits a fundamental difference in the market structure, when the spatial aspect is incorporated.