An Application of the Production Function Approach

Abstract

There is a surprising absence of serious econometric study of marketing in general, and that of the USSR in particular. The use of production functions in analysing the trade industry has been quite limited, and is confined to the use of the simple Cobb-Douglas form. Ofer used the Cobb-Douglas for Israeli firms and reported returns to scale of 1.2 to 1.3 for half of his models and even higher estimates for the rest (Ofer, 1973a, pp. 375–6). Arndt and Olsen did the same for Norwegian firms and found scale returns of 1.52, but also reported that scale effects seemed to disappear at the supermarket level (0.89), perhaps indicating the attainment of a classical long-run average cost curve minimum (Arndt and Olsen, 1975, p. 216). Other studies using a variety of simpler methodologies also have found U-shaped cost curves (Dean and James, 1942; Hall, Knapp and Winsten, 1961; Pickering, 1972). Tilley and Hicks (1970) reached the same conclusion regarding the loss of scale effects at the level of the supermarket by comparing net profits per square foot with total sales area. Tucker (1972) has criticised their work for omissions (i.e. storage, location, and space allocation) but not their simple methodology. All of the second group of studies suffer from the same weakness that they look at only one input at a time.