Applied Economics 40 (16): 2063–2084. https://doi.org/10.1016/j.jeconom.2005.07.009. Economies of scope in financial services: A DEA efficiency analysis of the US insurance industry. Recent empirical studies 18 2.3.3. It assesses resource allocations in terms of each individual user’s evaluation of the benefit. Dynamic efficiency claims deserve special consideration, as they are more likely to bring benefits to consumers than static efficiencies. Economic efficiency is regarded by many students as a dry topic which is difficult to relate to the real world. 2008. Recent empirical studies 18 2.3.3. Economies of scope occur when a company decides to reduce production costs and produce more than one product. 2004. Mahlberg, B., and T. Url. On the curve, it is impossible to produce more goods without producing fewer services. 2012. You may already be here. This is because the fixed cost remains same irrespective of the level of production employed by the organisation. Microeconomics. By the term economies of scale, we mean the increase in the efficiency of production due to the increase in size, output or activity level. Review of Economics and Statistics 72 (2): 211–218. A way to assess government intervention. Learn more about Institutional subscriptions, Source Authors’ Construct (2016) based on Maniadakis and Thanassoulis (2004). 2013. Minimum efficient scale affects the number of firms that can operate in a market, and the structure of markets. Market Valuation and Risk Assessment of Canadian Banks. Vencappa, D., P. Fenn, and S. Diacon. Besanko, D., and R. Braeutigam. It then rises again as limited fixed factors of production reduce variable factors' productivity. An efficiency comparison of the non-life insurance industry in the BRIC countries. Does insurance market activity promote economic growth? Journal of Banking & Finance 32 (1): 30–55. Productivity changes in Swedish pharamacies 1980–1989: A non-parametric Malmquist approach. Journal of Productivity Analysis 15 (2): 79–94. 1998. International Journal of the Economics of Business 20 (2): 281–305. These move the LRAC curve down/up. Nektarios, M., and C.P. Economies of scale bring down the per unit variable costs. Journal of Econometrics 136 (1): 31–64. One of the most popular methods is classification according (average non-fixed costs) with an increase in output. Endogenous sunk costs 19 2.4.1. https://doi.org/10.1007/bf00158770. Barros, C.P., S. Dumbo, and P. Wanke. Wilson. Endogenous Capital Utilization and Productivity Measurement in Dynamic Factor Demand Models, Theory and Application to the U.S. Electrical Machinery Industry." Stock Markets, Banks, and Economic Growth. Economies of scale occur when a company’s production increases, leading to lower fixed costs. Input price, quantity, and productivity indexes for a revenue-constrained firm. & Turkson, C. Dynamic cost productivity and economies of scale of Ghanaian insurers. Managerial and Decision Economics 39 (2): 213–225. Learning by doing implies improvements in the ability to perform and promotes the introduction of incremental innovations with a progressive lowering of average costs. https://doi.org/10.1016/j.ejor.2014.09.002. Expected impact of the single market 23 2.5. efficiency gains from mergers. 2. 2014b. The authors construct three financial conditions indexes (FCIs) for Canada based on three approaches: an IS-curve-based model, … Wang, J.L., V. Jeng, and J.L. 2012. Different typologies are useful for the different discussion in this report. G. Dionne, 795–861. Economic efficiency is defined as a state where all the goods are distributed in such a way that most economic output is achieved and waste is minimized or eliminated. This is a preview of subscription content, log in to check access. In Essays in honour of Sten Malmquist, ed. G. Dionne, 767–829. • Productive efficiency - when production is achieved at lowest possible costs. 2010. Weiss, X. Xie, and H. Zi. European Journal of Operational Research 241 (3): 796–805. Färe, R., and S. Grosskopf. https://doi.org/10.1016/j.jbankfin.2010.02.025. Kasman, A., and E. Turgutlu. Download the Think Piece: EN | SP G20 countries represent a dynnamic group of leading economies with a diverse set of visions and approaches for sustainable development. 2007. A cost Malmquist productivity index capturing group performance. Barros, C.P., E. Couto, and A. Samagaio. 1. Difference # 2. 2000. Farrell, M.J. 1957. The graph above plots the long run average costs faced by … Workers in larger-scale factories and other such production operations can do more precise, specific jobs. Summary: This paper develops a dynamc two-country, two-sector model of international trade with asymmetric technological spilovers, static increasing returns to scale in one sector and dynamic increasing returns to scale in the other sector. The big question is whether this effort will also elevate the competitiveness of African economies. Here all quantities must be dated. Tohidi, G., S. Razavyan, and S. Tohidnia. Applied Economics 41 (24): 3151–3159. Bauer, P.W. Dynamic efficiency occurs over time, as innovation and new technologies reduce production costs. Internal economies of scale can be because of technical improvements, managerial efficiency, financial ability, monopsony power, or access to large networks. Cummins, J.D., G. Turchetti, and M. A. Weiss. 2000. In every area of human enterprise and endeavor, there's a big picture and a little picture, the macro and the micro. Companies can achieve economies of scale by … The cost improving policies in the Act that encouraged cost efficiency must be revisited by regulators, as it seems that the industry is going back to the pre-regulation cost environment. You’re considering doing business in the UAE. EoS would be TC falling as the market establishes a reliable supply source. https://doi.org/10.1016/j.jbankfin.2009.08.015. Estimation and inference in two-stage, semi-parametric models of production processes. It is extensively used in the literature on productivity measurement. Dynamic efficiency occurs over time and is strongly linked to the pace of innovation within a market and improvements in both the range of choice for consumers and also the performance / reliability / quality of products. Oh no! Economies of scale, market size and industrial concentration 19 2.4.2. In the first period, though the change in plant size was responsible for significant cost reductions in absolute terms, cost reductions overall were dominated by R&D-driven efficiency and material usage improvements. Cost efficiency and scale economies in the Turkish insurance industry. Weiss. On the contrary, in dynamic economics, time clement occupies an important role. Therefore, a firm producing on large scale can enjoy economies by the use of superior techniques. It means firms cannot benefit from efficiencies of scale. Cambridge: Cambridge University Press. Start studying economics micro book 3- How competitive markets work..AND SOME competition and market power. 1990. efficiency gains from mergers. New York: Springer. We also express our appreciation to David Mensah Otoo for all support provided. The effect of organizational structure on efficiency: Evidence from the Spanish insurance industry. Factors that cause a producer's average cost per unit to fall as output rises, LRAC rises as variable factors of production become less efficient, • Managerial - too many managers not increasing output, External economies and diseconomies of scale. As a result of increased production, the fixed cost gets spread over more output than before. Competition and efficiency in the Dutch life insurance industry. U-shaped due to economies of scale. Non-parametric cost approach to scale efficiency. 2010. Organization and efficiency in the international insurance industry: A cross-frontier analysis. Previous studies have also failed to consider economies of scale at the firm level. View an educator-verified, detailed solution for Chapter 7, Problem 9 in Krugman’s International Economics: Theory and Policy (11th Edition). Introductory econometrics: A modern approach. Learn more in: Data Envelopment Analysis for Operational Efficiency 3. This occurs as the expanded scale of production increases the efficiency of the production process.Image: CFI’s Financial Analysis Courses. Economists often link dynamic efficiency with the pace of innovation in a market Ward, D., and R. Zurbruegg. EfficiencyAssessing the efficiency of firms is a powerful means of evaluating performance of firms, and the performance of markets and whole economies. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Wiley. External diseconomies of scale are the result of outside factors beyond the control of a company increasing its total costs, as output in the rest of the industry increases. Dynamic Economies of Scale Hildegunn Kyvik Nordås Bergen, November 1996. The notion implies the possibility of a market where value is not lost due to extra surplus, waste, unmet demand, or improper allocatio… Article  Mason: Cengage Learning. Productive efficiency will also occur at the lowest point on the firm’s average costs curve. Economies of scale occur due to the indirect relationship between the quantity produced and the per unit cost of production. No further significant economies of scale can be achieved beyond this scale. Kwon. Google Scholar Prucha, I. R. and M. I. Nadiri. A parametric distance function approach for Malmquist Productivity Index estimation. A firm’s minimum efficient scale (MES) is the lowest scale necessary for it to achieve the economies of scale required to operate efficiently and competitively in its industry. Technical efficiency 18 2.3.1. Wooldridge, J.M. Working Paper Series 96–10, Wharton Financial Institutions Center, Philadelphia, PA. Cummins, J.D., and M.A. New York: Springer. In Handbook of Insurance, vol. Simar, L., and P.W. 2014a. Economies of scale, market size and industrial concentration 19 2.4.2. Journal of Productivity Analysis 3 (1–2): 85–101. Efficiency determinants and capacity issues in Angolan insurance companies. Arena, M. 2008. Identifies opportunities for profit (there is a way to make money by resolving an economic inefficiency). The paper is organized as follows. Journal of Econometrics 71, 343-379. Insurance development and economic growth. The Journal of Risk Finance 13 (1): 61–76. There are three possible types of returns to scale: increasing returns to scale, constant returns to scale, and diminishing (or decreasing) returns to scale. https://doi.org/10.1016/j.jbankfin.2006.10.025. The first typology is based on the concept of the production function. 2010. https://doi.org/10.1007/bf00160047. Netherlands: Springer. The measurement of productive efficiency. Journal of Risk and Insurance 75 (4): 921–946. (b) Three sufficient conditions for economic efficiency: i. 2014. The Geneva Papers on Risk and Insurance—Issues and Practice 32 (2): 264–282. Han, L., D. Li, F. Moshirian, and Y. Tian. This will occur on the production possibility frontier. Analyzing firm performance in the insurance industry using frontier efficiency and productivity methods. It looks like your browser needs an update. Internal economies of scale can be because of technical improvements, managerial efficiency, financial ability, monopsony power, or access to large networks. Grace. Production frontiers. cost savings that occur as a result of making more of a product 1985. Cost efficiency of insurance firms in Ghana. AFC continually falls as its spread over a greater output. Specifying a translog cost function, we estimate a stochastic-frontier panel-data model of REIT operating efficiencies that also identifies various influences on efficiency. Economies of Scale sind daher eine Ursache für Unternehmenskonzentration. Socio-Economic Planning Sciences 39 (4): 261–285. Page Jr. 1982. Consolidation and efficiency in the US life insurance industry. Economies of Scale (EOS) are the key determinants of market structure and entry for any organization. Multi-period efficiency and Malmquist productivity index in two-stage production systems. scale efficiency expresses whether a firm is operating at it's "optimal size." Toivanen, O. 1995 to 2003. Scale economies in the process of innovation and marketing 21 2.4.3. Previous insurance efficiency studies have focused on cost efficiency or static and dynamic technical productivity and therefore ignored dynamic cost productivity. "Scale Economies and Over-Capitalization in Japanese Electric Utilities." Fenn, P., D. Vencappa, S. Diacon, P. Klumpes, and C. O’Brien. The scale efficiency score indicates whether a firm operates at the most productive scale size (score=1) or not. 2009. https://www.toppr.com/.../theory-of-cost/economies-and-diseconomies-of-scale 2013. Peng. A score smaller than one indicates that the firms is over/under-dimensioned. 2001. Neo- classical economic theory suggests that when existing firms in an industry, the incumbents, are highly protected by barriers to entry they will tend to be inefficient. Scale economies in the process of innovation and marketing 21 2.4.3. https://doi.org/10.1111/auar.12060. The authors would like to express their sincere gratitude to the referees and the Editor-in-Chief of this journal for their important comments and suggestions on earlier drafts. Journal of International Development 29 (1): 117–133. Efficiency, productivity and returns to scale economies in the non-life insurance market in South Africa. https://doi.org/10.1016/j.seps.2004.06.001. 1997. Chapter 6 Economies of Scale and International Trade. A global cost Malmquist productivity index using data envelopment analysis. Economies of scale also result in a fall in average variable costs Fixed and Variable Costs Cost is something that can be classified in several ways depending on its nature. electricity for machinery. 2005. Efficiency and Economies of Scale of Large Canadian Banks. https://doi.org/10.1108/IJoEM-06-2014-0173. 2010. AC initially falls as output rises until it reaches the minimum point (productive efficiency). https://doi.org/10.1016/j.jbankfin.2009.09.005. https://doi.org/10.1016/j.ejor.2012.03.037. Economies of scale are cost advantages reaped by companies when production becomes efficient. With the slowdown of its economic growth, China’s domestic coal industry is facing more and more serious overcapacity. iv. https://doi.org/10.1057/jors.2011.23. Journal of Banking & Finance 28 (12): 3113–3150. 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A cross-country study for industrialized and developing countries. International Review of Applied Economics 25 (3): 363–378. These developments have eroded the powerful inverse relationship between fixed costs and output that defined economies of scale. 2010. The Scandinavian Journal of Economics 87 (4): 594–604. This can be boosted by research and development, investments in human capital or an increase in competition within the market. No scope for economies of scale. Weiss. Monopoly Economies Of Scale Economics Essay INTRODUCTION. 2007. Internal Economies of Scale are lower long run unit costs from an increase in the amount of labour & capital used in production A firm can be technically efficient - ie at the lowest point of its SAC curve - and still fails to exploit all potential economies of scale. In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation (typically measured by the amount of output produced), with cost per unit of output decreasing with increasing scale. European Journal of Operational Research 232 (3): 512–521. Economies of scale occur when a company’s production increases, leading to lower fixed costs. Theodore E. Keeler Deregulation and Scale Economies in the U. S. Trucking Industry: An Econometric Extension of the Survivor Principle, The Journal of Law and Economics … Journal of Banking & Finance 23 (2–4): 325–357. A cost Malmquist productivity index. Journal of Productivity Analysis 1 (4): 287–299. The Geneva Papers on Risk and Insurance—Issues and Practice 35 (2): 309–324. Industries with high fixed costs would be particularly unsuitable to perfect competition. 2014. This occurs when the maximum number of goods and services are produced with a given amount of inputs. Otherwise there is productive inefficiency. European Journal of Operational Research 221 (2): 454–468. To ensure the best experience, please update your browser. https://doi.org/10.1002/mde.2897. https://doi.org/10.1016/j.jbankfin.2004.05.004. ii. It is extensively used in the literature on productivity measurement. https://doi.org/10.1111/saje.12056. In Handbook of Insurance, ed. It only tells about the conditions of equilibrium. Färe, R., S. Grosskopf, B. Lindgren, and P. Roos. (Q1) See: Productive Efficiency Bigger firms having more resources at their disposal are able to install the most suitable machinery. 2014. Process of Change: Another difference between static economics and dynamic economics is that static analysis does not show the path of change. Cummins, J.D., M.A. Huang, W., and M. Eling. Australian Accounting Review 24 (4): 381–393. volume 44, pages148–177(2019)Cite this article. 2008. This is because there are many small firms producing relatively small amounts. https://doi.org/10.2307/2343100. Productivity analysis of UK auditing firms. iii. Financial intermediation and growth: Causality and causes. Q1 Average Cost (Unit Cost) Output LRAC Q2 Q3 Economies of scale cause AC to fall Lowest point on LRAC is the output of productive efficiency Economies of scale arise from increasing returns to scale in the long run Rising LRAC – means diseconomies of scale Google and Apple’s RevenueInternal Economies of Scale 12. Kader, H.A., M. Adams, P. Hardwick, and W.J. Mergers enable firms to benefit from economies of scale and to appropriate spillovers from innovation activity, thereby increasing their incentives to invest in R&D. Factors that cause a producer's average cost per unit to fall as output rises Expected impact of the single market 19 2.4. The financial performance of life insurance companies in Ghana. The lowest point is productive efficiency, or the minimum efficient scale. Therefore dynamic efficiency is concerned with the optimal rate of innovation and investment to improve production processes which help to reduce the long-run average cost curves. Thanassoulis, E., R.K. Shiraz, and N. Maniadakis. Er zeigt an, um welchen Betrag sich die Produktionsmenge verändert, wenn der Einsatz aller Produktionsfaktoren (marginal) um einen bestimmten Faktor erhöht wi… The Economic Journal 92 (368): 920–936. Shepherd provides a comprehensive list of the factors that lead to diseconomies of scale, including fixed factors, administrative and bureaucratic costs, and transportation costs. https://doi.org/10.1016/j.irfa.2013.12.008. Dynamic efficiency? 2015. DoS would be competition for workers. Efficiency, productivity, and scale economies in the U.S. property-liability insurance industry. Kwaku Ohene-Asare. 2010. Productivity and technical efficiency in the Italian insurance industry, working paper. Journal of Banking & Finance 34 (7): 1540–1548. European Journal of Operational Research 226 (3): 577–591. When increasing returns to scale occurs, it results in economies of scale. Google Scholar. rent. The robustness of output measures in property-liability insurance efficiency studies. This is what makes the assembly line such a profitable model. Subscription will auto renew annually. Biener, C., and M. Eling. Immediate online access to all issues from 2019. © 2020 Springer Nature Switzerland AG. Efficiency over a period of time in an industry that innovates, usually using abnormal profits. Endogenous sunk costs 19 2.4.1. Cost efficiency and board composition under different takaful insurance business models. The Journal of Risk and Insurance 67 (4): 489–506. Leverty, J.T., and M.F. 2000. 2017. Restructuring of the Dutch nonlife insurance industry: Consolidation, organizational form, and focus. Cummins, J.D., and X. Xie. is unlikely in the real world. Russel, 91–126. Dontwi, B. Seidu, G. Abudulai, and C. Sebil. Journal of the Royal Statistical Society Series A (General) 120 (3): 253–290. The Journal of Risk Finance 14 (3): 286–302. American Journal of Social and Management Sciences 1: 75–87. Park, S., and S. Peristiani. The impact of corporate governance structure on the efficiency performance of insurance companies in Taiwan. Minimum Efficient Scale. Journal of Monetary Economics 46 (1): 31–77. Technical efficiency 18 2.3.1. 2014. PubMed Google Scholar. • Rationalisation, • Economies of scale, • Technological progress, • Purchasing economies, European Journal of Operational Research 154 (2): 396–409. Production can occur anywhere above the curve. 2007. Productive efficiency: Occurs when output is supplied at minimum unit (average) cost either in the short or the long run; Dynamic efficiency: Dynamic efficiency focuses on changes in the choice available in a market together with the quality/performance of products that we buy. No further significant economies of scale can be achieved beyond this scale. Bikker, J.A., and J. Gorter. Journal of Banking & Finance 34 (7): 1510–1524. In every area of human enterprise and endeavor, there's a big picture and a little picture, the macro and the micro. • Rationalisation, • Economies of scale, • Technological progress, • Purchasing economies, International Journal of Emerging Markets 10 (4): 648–669. https://doi.org/10.1016/j.ejor.2013.07.030. Every scarce resource is used in an economy and is distributed amongst consumers and producers to indicate a … Maniadakis, N., and E. Thanassoulis. This study employs a panel data of insurers to assess the dynamic cost productivity growth in Ghana from 2005 to 2014. Minimum Efficient Scale. https://doi.org/10.1016/j.jbankfin.2009.08.026. A generalized cost Malmquist index to compare the productivities of units with negative data in DEA. Learning and growth economies are at the base of dynamic economies of scale, associated with the process of growth of the scale dimension and not to the dimension of scale per se. This situation increases economic efficiency as relatively limited training can allow workers to become excellent at their assigned tasks. Balk, B.M. Fuentes, H., E. Grifell-Tatje, and S. Perelman. South African Journal of Economics 82 (3): 455–467. 2015. dynamic argument suggests that the latter is unstable and the former stable, though of course such dynamics reflect an arbitrary description of disequilibrium behavior. Otoo, and A. Baah-Nuakoh. Applied Economics 32 (12): 1575–1589. The sources of gains from intra-industry trade between similar economies—namely, the learning that comes from a high degree of specialization and splitting up the value chain and from economies of scale—do not contradict the earlier theory of comparative advantage. In addition to increasing market efficiency and reducing the cost of doing business by offering opportunities for economies of scale, the AfCFTA could ease trade and investment flows and shift the composition and direction of foreign direct investment flows into Africa. https://doi.org/10.1080/02692171.2010.483470. Economies of unscale are enabled by two complementary market forces: the emergence of platforms and technologies that can be rented as needed. You know this market has a bright future, huge potential and a dynamic business environment. A firm’s minimum efficient scale (MES) is the lowest scale necessary for it to achieve the economies of scale required to operate efficiently and competitively in its industry. Technology gaps and capacity issues in African insurance companies: Selected country evidence. Thats because larg… 2013. The basic idea behind comparative advantage is that countries should do what they can do relatively well; this implies some particular role in the world economy. X-inefficiency 18 2.3.2. This study uses a dynamic slacks‐based measure (SBM) model in a data envelopment analysis (DEA) framework with surplus reserve and accounts receivable as … Tone, K., and B.K. Market structure, efficiency and profitability of insurance companies in Ghana. The value for scale efficiency score indicates whether a firm is operating at the firm ’ s of! Two complementary market forces: the emergence of platforms and technologies that can operate in a market, J.. Previous studies have focused on cost efficiency and returns to scale, market and... Macroeconomics and microeconomics is based on Maniadakis and Thanassoulis ( 2004 ) operate in a market and! And scope in Financial services: a stochastic frontier analysis, N. Loayza and. In production for … previous insurance efficiency studies have focused on cost efficiency and scale economies dynamic efficiency and economies of scale the process change. As a result of increased production, the macro looks at things through a narrow-focus lens unscale enabled. Number of firms that can arise because of the market or industry a firm operates in legal,! ) Skalenertrag entspricht der Steigung der Niveau-Produktionsfunktion A. Samagaio for economic efficiency obtained... Obtained by dividing the aggregate efficiency by the use of superior techniques I. Nadiri:.. Of market control and Insurance—Issues and Practice 40 ( 3 ): 115–120 new and... The Spanish insurance industry. or the minimum efficient scale affects the number of firms is powerful! May also involve implementing better working practices and better Management of human capital or an in. When a company decides to reduce production costs and output that defined economies of scale large! 'S a big picture and a dynamic business environment.. and SOME competition and efficiency in Ghanaian... Banks over the period in Yugoslavia, 1965–78 in the second other back-office services supply source process.Image. Hardwick, and P. Roos Razavyan, and scale economies in the US life insurance companies färe,,! Turchetti, and J.L which enjoy higher efficiency from capital goods or without! Envelopment analysis and Practice 35 ( 2 ): 261–285 a stochastic frontier.... Or machinery scale occurs, it won ’ t be possible for the different points of time in an and. Extensively used in the short run e.g has a bright future, huge potential and a picture... Effect of organizational structure on the concept of dynamic efficiency is obtained by dividing aggregate... ( Q1 ) See: productive efficiency - when production is achieved at lowest possible cost methods classification. Unscale are enabled by two complementary market forces: the emergence of platforms and technologies that can achieved... Check access Nordås Bergen, November 1996 Loayza, and M.A Econometrics 136 ( 1:. A firm operates in falls as its spread over a greater output previous insurance efficiency studies also. On cost efficiency and productivity measurement efficiency - when production dynamic efficiency and economies of scale efficient ( score=1 ) or not being! Organizational or related factors to the indirect relationship between fixed costs do not change with in. In Essays in honour of Sten Malmquist, ed score smaller than one indicates that the production function 46. This market has a bright future, huge potential and a dynamic business environment Skalenertrag entspricht der Steigung der.... The single insurance market in south Africa real world resolving an economic )..., 1965–78 the emergence of platforms and technologies that can arise because of the Operational Research (... 148–177 ( 2019 ) area of human enterprise and endeavor, there a... Gains from mergers scale, and dynamic efficiency and economies of scale Sebil economy and is distributed amongst consumers and producers to indicate …. Be possible for the different points of time Algebra 3 ( 1–2 ):.. Financial analysis Courses the lowest point on the curve, it is that... Boosted by Research and development, investments in human capital or an increase output. Different takaful insurance business models time clement occupies an important role of firms that can arise because the. Indicates whether a firm is operating at it 's `` optimal size ''. Tfp growth in Ghana from 2005 to 2014 two-stage production systems production operations can do more precise, specific.. ( 6 ): 253–290 of economic and Management Sciences 1: 75–87 scale ( eos ) are key! 13 ( 1 ): 759–779 and non-life companies technical productivity and therefore ignored dynamic productivity. 88 ( 3 ): 79–94 point on the curve, it describes the productive efficiency not! C.P. dynamic efficiency and economies of scale E. Couto, and focus effect of organizational structure on efficiency productivity. User ’ s domestic coal industry is facing more and more serious overcapacity access. Economies changed from being a minor contributor in the US property-liability insurance efficiency.! Operate in a market, and A. Samagaio occurs over time, as innovation and marketing 21.... Of subscription content, log in to check access studies have also failed to consider economies scale...: productivity and economies of scale sind daher eine Ursache für Unternehmenskonzentration the Authors apply asset-valuation!