MEASURING ECONOMIES OF DIVERSIFICATION - A FRONTIER APPROACH

The purpose of this article is to improve the statistical analysis of multiproduct-firm behavior. Specifically we are interested in modeling and estimating multiproduct technology focusing on size and product-line variation. Thus we offer a new empirical technique that can be used to directly analyze issues such as subadditivity, expansion-path subadditivity, economies of scope, and economies of diversification. Although applied papers employ a wide variety of theoretical multiproduct cost concepts, previous work uses nonfrontier estimation techniques. We show how to introduce frontier approaches to multiproduct cost analysis that can be applied to any of these concepts and improve the statistical analysis. Specifically, we introduce an empirical test using frontier techniques that allows for direct measures of economies of diversification at the firm-specific level.