Cost Economies: A Driving Force for Consolidation and Concentration?
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Expanding concentration in many industries has generated concern about the extent and
determinants of these market structure patterns. Understanding such trends requires
information on technological characteristics underlying cost efficiency. However, market
structure and power analyses are typically based on restrictive models that limit the
representation of cost drivers. In this paper we model and estimate a comprehensive cost
specification allowing for utilization, scale, scope, and multi-plant economies, using U.S. beef
packing plant data. We find evidence that these cost economies are substantive, and in
combination cause a short-fall of marginal from average cost, provide economic motivations for
concentration, consolidation, and diversification, and facilitate the interpretation and use of
market structure measures.