Measuring Economies of Diversification: A Frontier Approach.

The purpose of this paper is to improve the statistical analysis of multiproduct firm behavior. The authors 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. Previous applied work has used "nonfrontier" estimation techniques. The authors show how to introduce frontier approaches to multiproduct cost analysis, which can be applied to any of these concepts and improve the statistical analysis. Specifically, the authors introduce an empirical test using frontier techniques that allows for direct measures of economies of diversification at the firm-specific level.