Working Paper: NBER ID: w9965
Authors: Alvin J. Silk; Ernst R. Berndt
Abstract: We assess size and scope-related economies in the global advertising and marketing services business. A translog cost function is employed wherein a firm's costs vary according to its scale and two dimensions of the scope of its operations. Parameters of the model are estimated via three stage least squares using annual data for 1989-2001 for an unbalanced panel consisting of the eight largest firms in this industry. A firm's total variable costs are affected by its scale, scope (mix of services and markets served), and by the interaction of the two dimensions of scope. The latter effect suggests that economies of coordination may accompany the strategy of jointly offering advertising and marketing services globally. Estimates indicate that the industry's long-run cost function is subject to very slight economies of scale. Diseconomies of scale accompany growth in volume obtained by extending either breadth of service offerings or market coverage. A small cost advantage, typically of one to two percent, is uniformly associated with joint production of services for the domestic and overseas markets, as compared to splitting up the firm into smaller stand-alone entities. Scope economies of a similar magnitude arise consistently from the joint production of advertising and marketing services.
Keywords: No keywords provided
JEL Codes: L1; L2; L8; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm's scale (D21) | Total variable costs (D24) |
| Firm's scope (L25) | Total variable costs (D24) |
| Mix of services offered (L89) | Total variable costs (D24) |
| Markets served (L89) | Total variable costs (D24) |
| Interaction between scale and scope (L25) | Total variable costs (D24) |
| Joint production of services globally (H44) | Economies of coordination (P11) |
| Joint production of services (H44) | Cost advantage (F11) |
| Joint production of advertising and marketing services (M30) | Scope economies (F12) |
| Service breadth expansion (L84) | Diseconomies of scale (F12) |
| Market coverage expansion (M31) | Diseconomies of scale (F12) |
| Total variable costs (D24) | Slight economies of scale (D24) |
| Total variable costs (D24) | Slight economies of scope (F12) |