Holding Company Cost Economies in the Global Advertising and Marketing Services Business

We assess size and scope-related economies in the global advertising and marketing services business. A translog cost function is employed wherein a firm’s costs vary according to its scale and two dimensions of the scope of its operations. One dimension of firm scope relates to how its output is distributed across the global markets it serves (domestic vs. overseas) and the other to how its output is distributed across the line of services it offers (advertising-related vs. other marketing services). Parameters of the model are estimated via three stage least squares using annual data (1989-2001) for an unbalanced panel consisting of the eight largest holding companies in this industry.A firm’s total variable costs are affected by its scale, scope (mix of services and markets served), and by the interaction of the two dimensions of scope. The latter effect suggests that cost economies may accompany the dual diversification strategy of jointly offering advertising and marketing services globally. Estimates indicate that the industry’s long-run cost function is subject to very slight economies of scale, i.e., total variable costs increase less than proportionally as outputs increase. Consistent with the presence of modest global scale economies, product-specific diseconomies of scale accompany growth in volume obtained by extending either breadth of service offerings or market coverage. Scope economies arise when cost savings can be realized by a single firm jointly producing several services or jointly serving multiple markets as compared to splitting up the firm into smaller, stand-alone entities, each one producing just one service or serving a single market. A small cost advantage, typically of approximately two percent, is uniformly associated with joint production of services for both the domestic and overseas markets. Cost savings of a similar magnitude arise consistently from the joint production of advertising as well as other marketing services.