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A Variance Component Approach To Industry Cost Analysis

  • Richard L. Kilmer (a1) and Daniel S. Tilley (a1) (a2)

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Cost and volume data used in long-run cost studies often are observations from a single cross-section on firms or the average of multiple observations for each firm [1, 3, 5]. Averaging costs and volume over a time series is designed to eliminate the effect of short-run disturbances on the estimated long-run cost function. This practice results in a loss of information on the cost effects of short-run disturbances and significantly reduces the potential degrees of freedom that could result from pooling cross-sectional time-series data. In order to pool data, binary variables for each firm previously have been used to account for short-run fixed firm effects [4].

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[1]Allen, Robert F.Cross-Sectional Estimates of Cost Economies in Stock Property-Liability Companies,” The Review of Economics and Statistics, Volume 56, February 1974, pp. 100103.
[2]Allen, Robert F.Season Annual Report, Winter Haven, Florida: Division of Fruit and Vegetable Inspection, various issues.
[3]Griliches, Zvi. “Cost Allocation in Railroad Regulation,” The Bell Journal of Economics and Management Science, Volume 3, Spring 1972, pp. 2641.
[4]Johnson, Paul R.Some Aspects of Estimating Statistical Cost Functions,“ Journal of Farm Economics, Volume 46, February 1964, pp. 179187.
[5]Keeler, Theodore E.Airline Regulation and Market Performance,” The Bell Journal of Economics and Management Science, Volume 3, Autumn 1972, pp. 299424.
[6]Machado, Virgilio Azuil Pascoa. “A Dynamic Mixed Integer Location Model Applied to Florida Citrus Packinghouses,” unpublished Ph.D. dissertation, University of Florida, 1978.
[7]Maddala, G. S.The Use of Variance Components Models in Pooling Cross Section and Time Series Data,” Econometrica, Volume 39, March 1971, pp. 341358.
[8]Maddala, G. S.Econometrics, New York: McGraw-Hill Book Company, 1977.
[9]Stolisteimer, J. F., Bressler, R. G., and Boles, J. N.. “Cost Functions from Cross-Section Data—Fact or Fantasy?”, Agricultural Economics Research Volume 13, July 1961, pp. 7988.
[10]Wallace, T. D. and Hussain, Ashig. “The Use of Error Component Models in Combining Cross-Sectional with Time-Series Data,” Econometrica, Volume 37, January 1969, pp. 5772.
[11]Ward, Ronald W. and Davis, James E.. “A Pooled Cross-Section Time-Series Model of Coupon Promotions,” American Journal of Agricultural Economics, Volume 60, August 1978, pp. 393401.
[12]Ward, Ronald W. and Kilmer, Richard L.. The United States Citrus Subsector: Organization, Behavior and Performance, North Central Regional Research Publication No. 263, NC-117 Monograph 8 (in press).

A Variance Component Approach To Industry Cost Analysis

  • Richard L. Kilmer (a1) and Daniel S. Tilley (a1) (a2)

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