Scale, Scope and Capacity Utilization in DEA

The indivisibility argument plays an important role to explain scale, scope and capacity utilization behavior of multi-product firms. This paper makes an attempt by examining the economic relationship among scale, scope and capacity utilization in the context of a multi-stage production model where idle capacities arising from indivisibilities lead to scale and scope effects. Using the nonparametric approach called data envelopment analysis (DEA), we have modeled this multi-stage production process to reveal the underlying cost structure, which exhibits such scale and scope economies due to idle capacities arising from indivisibilities in inputs. Our empirical example of multi-stage production demonstrates that first, economies of scope are negatively correlated with capacity utilization, and second, idle capacities are negatively correlated with capacity utilization but positively with economies of scope