A COMPOSITE COST FUNCTION FOR MULTIPRODUCT FIRMS WITH AN APPLICATION TO ECONOMIES OF SCOPE IN BANKING

The composite cost function we propose combines a quadratic output structure with a log-quadratic input price structure and is well suited for examining economies of scope, subadditivity, and other important properties of multiproduct firms. To compare the composite model with an appropriate set of alternative functional forms, we develop a parsimonious-but general-specification that nests the standard translog cost function, the generalized translog cost function, a separable quadratic cost function, and the composite cost function. An application to economies of scope in banking confirms the advantages of the composite model.