Economies of Size and Operating Efficiency of Livestock Markets: A Frontier Function Approach

Abstract

A cost curve for livestock auction markets was estimated using a frontier function estimator. This estimator has the advantages of consistency and asymptotic efficiency (for certain disturbance specifications). The one-sided residuals satisfy theoretical requirements for cost curves and allow estimates of operational efficiency. Results indicate little size savings above 50,000 LMU, (12 percent of markets in 1976). Estimated operational inefficiencies ranged from 0 to 45 percent. Total technical efficiency (size diseconomies plus operational inefficiencies) are high for some markets and some size groups. Little consolidation is predicted for the industry because the estimated cost of technical inefficiency is small compared to distance related costs (e.g., transport and shrink).