Economies of Density and Productivity in Service Industries: An analysis of personal service industries based on establishment-level data

Author Name MORIKAWA Masayuki  (Senior Fellow, RIETI)
Creation Date/NO. April 2008 08-J-008
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The purpose of this paper is to investigate the basic facts of service industry productivity, such as economies of scale, economies of scope, and economies of density in Japan. Specifically, by using establishment-level data on 10 personal-service industries in which the simultaneity of production and consumption is especially prominent, the paper estimates production functions and decomposes geographical factors causing productivity gaps among establishments.

Key findings from the analysis are as follows:

1. In almost all the examined service industries, economies of scale in terms of establishment size and company size, and economies of scope are found.

2. In almost all the examined service industries, significant economies of demand density are observed, with productivity increases of 10%-20% when municipality population density doubles. The sizes of these coefficients are substantially larger than those observed in manufacturing industries for which sales destinations are far less restricted geographically; demonstrating demand density's importance to the productivity of service industries.

3. The above findings are confirmed by estimation using measures of physical output instead of the amount of value added.

4. Of the productivity dispersion observed among service establishments across Japan, those attributable to gaps among prefectures are extremely limited whereas those explained by gaps among municipalities are relatively large.

These findings suggest the possibility that consolidation and expansion at an establishment level as well as multi-store and chain store operations at a company level may help improve the productivity of personal service industries. Formation of population-dense areas is also suggested, as this would have a positive effect on productivity. This, however, may involve the trade-off between productivity improvement and other social and/or economic policy goals.