Scale Economies in the Multiplant Firm: Theory and Empirical Evidence

Central to the theory of the firm, economies of scale are the first line of defense for industrial concentration and for large business enterprises. But the literature on economies of scale deals primarily with the plant. Little empirical work has been done on firm scale economies, especially the multiplant firm. This paper takes issue with the common practice by economists of dismissing multiplant scale economies as vague or absent. After constructing an analytical framework for studying economies of scale in a multiple-plant setting, an optimization approach is used to quantitatively estimate multiplant scale economies of a particular type in two industries. Also developed are estimates of economies of scale from firm size, properly embedded in a multiplant analysis. The empirical results yield some interesting observations on the complexity of the concept of optimal plant size.