Cost Economies: A Driving Force for Consolidation and Concentration?

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.