Product Complementarity in Production: The By-product Case

Abstract

The product-product relationship has been a traditional subject of most production economics and farm management courses for the past two decades. Although the traditional examples of product-product optimization have come primarily from the agricultural production sector (e.g., legume-corn rotations and crop-livestock combinations), the concept is useful in analyzing the organization of any multi-product firm-including those firms which produce externalities in the form of environmental degradation.Three concepts or ideas usually are offered as giving rise to a positively sloped or complementary range on the product transformation surface-(l) one production process uses as an input a by-product of another production process, (2) one process uses quantities of a factor that are “surplus” to another, or (3) technical interaction (production function shifts) occurs.