European Journal of Operational Research 152 (2004) 5671 www.elsevier.

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Continuous Optimization

Goal programming, regulation and generalised economies of scale and scope

Michael J. Ryan
*
Department of Economics, University of Hull, Hull HU6 7RX, UK Received 28 January 2002; accepted 5 September 2002

Abstract In this paper a new class of goal programming models are employed to dene economies of scale and scope rst with reference to distribution models and then with reference to more general linear and nonlinear goal programming models. Applications to interregional production, regulation and exchange are provided and in every case these models yield competitive results as special cases. But in their general form the models and associated results correspond to appropriately regulated market conditions with regulation being determined inter alia by means of appropriate supply and/or demand goal oriented taxes and subsidies. 2002 Elsevier B.V. All rights reserved.
Keywords: Goal programming; Regulation; Scale; Scope

1. Introduction This paper deals with and generalizes the existing treatments of several topics. These include: (1) the more for less (or nothing) paradox in the distribution model of linear programming as in the work of Szwarc (1971) and Charnes and Klingman (1971); (2) economies of scope and scale as in the theory of contestable markets developed by Baumol et al. (1982) along with regulation and regulatory eects in regional and regionally separated markets as formulated in Samuelson (1952) and Dafermos and Nagurney (1987); (3) a unifying basis for treating these diverse topics in the form of a goal programming model that generalizes the standard versions of goal programming that have been used since their initial publication in Charnes and Cooper (1961). The rst topic treated is new results on the more for less (nothing) paradox in linear programming. These comprehend as special cases the more for less paradox in the distribution model (Szwarc, 1971; Charnes and Klingman, 1971; Ryan, 1980; Charnes et al., 1980) and the more for less paradox as applied to the diet problem by Charnes et al. (1987). Then in Section 3 I develop new nonlinear and maximizing generalizations

Tel.: +44-1482-466-217; fax: +44-1482-466-216. E-mail address: m.j.ryan@econ.hull.ac.uk (M.J. Ryan).

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of these more for less results before going on in Section 4 to establish still more general goal programming and potentially explicitly regulatory specications of more for less and more for nothing cases. In Section 5 I set out a nonlinear multirm, multiproduct and multiregion goal programming model in a form consistent with all of these earlier developments. In Sections 69 I then show how all of these earlier models are potentially consistent with appropriately dened and explicitly regulated conditions of economies of scope and of scale. Finally, in Sections 10 and 11, I focus more narrowly on issues of contestability in relation to spatial monopoly, oligopoly and competition in general, and in relation to explicitly spatial extensions of denitions of contestability by Baumol et al. (1982) and in relation to contestability related works of Eaton and Wooders (1985) and Norman and Thisse (1996) in particular.

2. More for less (nothing) in linear programming Theorem 1. Let xj , cj be the unit output and the unit cost of output of type j, bi be the resource availability of type i and aij be the amount of input i required per unit output of type j. Then, if an optimal solution exists for programme (I) min s:t:
n X j1 n X j1

cj xj i 1; 2; . . . ; m I

aij xj bi ;

xj P 0 8j z P z0 min s:t:
n X j1 n X j1

cj xj i 1; 2; . . . ; m Ia

aij xj Si bi ;

Si ; xj P 0 8i; j

Proof. Any optimal solution to (I) is a feasible solution to (Ia), but not conversely. Thus any optimal solution to (I) is a feasible but not necessarily an optimal solution to (Ia). It follows that there may exist optimal solutions to (Ia) such that z > z0 or z z0 with Si > 0 some Si . This is the main result in Charnes et al. (1987), (though the proof here is more succinct). Within the context of the well known diet problem, in which the xj would be foods, bi minimum dietary requirements and cj unit costs, this theorem states the apparently paradoxical fact that in certain circumstances a diet exceeding minimum daily requirements of nutrients may be cheaper than one exactly meeting all of those requirements. (For more on this example and results concerning the degeneracy of more for less and more for nothing cases see Charnes et al. (1987).) Another class of examples are distribution problems in which disjoint subsets bi , i 1; . . . ; m and bi , i m 1; . . . ; n are origin availabilities and destination requirements of a commodity and xj , cj are shipments and costs of shipments from origins i 1; . . . ; m to destinations i m 1; . . . ; n with aij  1 for all i,

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j. In that context Theorem 1 is consistent with the more for less paradox in its original form, viz. (here Ri and Kj are the dual variables associated with constraints i 1; . . . ; m and i m 1; . . . ; n respectively): Given a nondegenerate (bounded) optimal solution to (I) with m n 1 positive shipments it is possible to ship more total product at less total cost while shipping at least as much from each origin and to each destination if and only if Ri Kj < 0 for some nonbasic route ij, (Charnes and Klingman, 1971, Theorem 1.40, p. 12) In Ryan (1980), I developed both linear and nonlinear applications and examples and economic interpretations in relation to spatial competition as well as for noncompetitive cases of the distribution problem, and showed that more for less and more for nothing cases would necessarily be degenerate and decomposable. In particular I showed that, for such cases, if more for less or more for nothing conditions are exploited, a connected set of markets optimally decomposes into spatially disjoint sets of submarkets. (That degeneracydecomposability result was proved formally in Charnes et al. (1980).) Although more work has since been done on the distribution model and the more for less (nothing) paradox by others (see for example Arsham, 1992; Gupta and Puri, 1995), they have not explored or developed any of these spatial economic interpretations of it. One purpose of this paper is to explore these wider classes of economic interpretations of more for less phenomenahere specically with reference to nonlinear economic models with production and to economies of scale and scope.

3. Nonlinear and maximizing cases Theorem 1 is a special case of the following result in which the relationsP x1 ; xj ; . . . ; xn and f gx1 ; xP. . . ; xn are understood as potentially respectively generalizing the relations ; cj xj and the condij tions aij xj bi in (I) and (Ia). Theorem 2. If an optimal solution exists for programme (II) then max f x1 ; xj ; . . . ; xn s:t: gi x1 ; xj ; . . . ; xn 0; xj P 0 z 6 z0 max f x1 ; xj ; . . . ; xn s:t: gi x1 ; xj ; . . . ; xn Si 0; Si ; x j P 0 Proof (As for the linear programming case). Any optimal solution to (II) is a feasible solution to (IIa), but not conversely. Thus any optimal solution to (II) is a feasible but not necessarily an optimal solution to (IIa). It follows that there may exist optimal solutions to (IIa) such that z0 > z or z0 z with Si > 0 some Si . To be consistent with the terminology used in Section 1, Theorem 2 might properly be called a less for more (nothing) result-in the sense of more (equal) payo for less inputs. Since the statement and proof of Theorem 2 do not impose any restrictions on the form of relations f x1 ; xj ; . . . ; xn , gi x1 ; xj ; . . . ; xn this i 1; 2 . . . ; m II

i 1; 2; . . . ; m

IIa

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result is very general. (As one class of examples Theorem 2 includes linear forms for the objective in which case it becomes equivalent to a less for more linear programming result wholly analogous to Theorem 1 for the minimization case.) An agricultural example will serve to illustrate Theorem 2. According to the theorem a prot (or preference) maximizing farmer with land and labour as inputs to production would not necessarily choose the production plan fully employing both all available land and all of his/her available labour. (For example due to seasonality of productivity of land and/or of demand for crops.)

4. Further and more general cases Now consider a generalization of the goal programming model by extending Theorems 1 and 2 as follows: Theorem 3. Let bi be exogenously specified target levels for input and output quantities of type i and s , s be i i interpreted as respectively measuring deviations below or above those targets. If also the quantities M are defined to be bigger than any real number so that M ) c and M ) c , it follows that, if an optimal solution i i exists for programme (III) m m X X s M s max f x; xj ; . . . ; xn M i i
i1 i1

s:t:

n X j1

aij xj s s bi ; i i

i 1; . . . ; m

III

xj ; s ; s P 0 8j; i i i z 6 z0 max f x1 ; . . . ; xj ; . . . ; xn s:t:

n X j1 m X i1

c s i i

m X i1

c s i i IIIa

aij xj s s bi ; i i P 0 8j; i

i 1; . . . ; m

xj ; s ; s i i

Proof (Similar to that of Theorem 2). Any optimal solution to (III) is a feasible solution to (IIIa), but not conversely. Thus any optimal solution to (III) is a feasible but not necessarily an optimal solution to (IIIa). It follows that there may exist optimal solutions to (IIIa) such that z0 > z or z0 z with s , s > 0 some s , i i i s . i Notice that Theorem 2 corresponds to a class of special cases of Theorem 3 for which Si def s and for i which all c are preemptively large and all s correspondingly zero. Secondly, an entirely analogous j i minimizing specication would generate minimization cases comprehending the conditions of Theorem 1 as special cases. If the objective and constraints are linear, program (III) and Theorem 3 are consistent with standard goal programming interpretations. Conversely, the specication in (III) is a generalization of standard goal programming specications and results. Specically if the relations f x1 ; . . . xj :xn are omitted, then (IIIa)

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takes the form of the standard goal programme as rst formulated by Charnes and Cooper (1961). (For a categorized bibliography of goal programming methods and applications see Romero (1991, pp. 106120). See also the special issue of this journal edited by Aouni and Kettani (2001).) One interpretation of this approach, which potentially yields higher optimal via nonzero optimal values for one or more of the quantities s , s , is that the approach to solvability here is the reverse of that i i commonly employed in linear programming. One rst seeks to maximize f x1 ; . . . ; xj ; . . . ; xn without reference to the terms with coecients M in (III). If the resulting solution to (III) has s s 0 all j then a i i solution wholly consistent with the target conditions bi is attained. Otherwise (explicitly or implicitly) adjoin the constraint z 6 f x1 ; . . . ; P . . . ; xn ,P xj ; where z is the already obtained optimal value to (III). Then one also seeks to minimize the sum ci si c s in that sense acting as if to get as close as possible i i to targets bi while recognising that deviations from one or more of those targets may in fact be relatively desirable in the sense of a potential gain in moving from an optimum to (IIIa) from an optimum to (III). (In this way problem (III) provides a procedure for solving a system of linear equations as closely as possible along with a solution to an optimisation problem in a manner that generalizes the procedure described in Section 26-2 of Charnes and Cooper (1965).) In the present context it is particularly signicant that s , s in (III), (IIIa) can be interpreted as regi i ulatory variablesthat is as quantities potentially encouraged or penalized by c , c with interpretations i i potentially corresponding to unit subsidies or taxes. With those interpretations partially or wholly unregulated constraints via c and/or c 0 become special cases of regulated constraints. Correspondingly, i i via the KuhnTucker conditions, unregulated dual variables become special cases of regulated dual variables. A production related example will help here. Accordingly interpret xj , pj in (IIIa) as outputs and unit prot contributions to crops j and bi , i 1; 2; . . . ; i as constraints on available resources, with bi , i i 1; . . . ; i j as potentially regulated target levels for outputs j and associate dual variables li , i 1; 2; . . . ; i , ui , i i 1; . . . ; i m with the potentially input regulated and output regulated constraints of that system to generate its dual, (IIIa)0 *, for a linear case: max s:t:
n X j1 m X j1

p j xj

i m X i1

c s i i

i m X i1

c s i i IIIa

aij xj s s bi ; j j

i 1; 2; . . . ; i

x j s s bi ; i i xj ; s ; s P 0 8j; i i j min s:t:

i X i1 i X

i i 1; . . . ; i m

li bi

i m X ii 1

u i bi

li aij ui j P pi j ; j 1; 2; . . . ; n ii c 6 li 6 c ; i 1; 2; . . . ; i i i c 6 uj 6 c ; i i 1; . . . ; i m i j xj ; s ; s P 0 8j; i j j

IIIa

Clearly (IIIa)* is open to interpretation as determining the planting plan that will maximize the net contribution from available resources bi , i 1; 2; . . . ; i given targets (if any) bi , i i 1; . . . ; i j; . . . ; i m for outputs xj . On the dual side the rst constraints of (IIIa)0 * are associated with the optimal

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decision rule: produce output j, if at all, then only to the point where the prot contribution pj is exactly P sucient to recoup the internal opportunity costs of the resources used li aij plus or minus a regulatory adjustment uj . From the third constraints that regulatory adjustment uj may take on interpretations variously as a regulatory tax (if optimally s > 0) or a regulatory subsidy (if optimally s > 0). The second j j constraints allow for the possibility that the resource price is optimally set externally (e.g. via prices associated with optimal levels of rented in or rented out factors i, i 1; 2; . . . ; i (e.g. land) for which respectively s > 0, s > 0 at an optimum to (IIIa). (Note the interrelation of goals taxes and subsidies in this i j example. For more on this see Ryan (1978, 1992, 2000).) As well as interpretations in relation to output and resource related goals taxes or subsidies, wider regulatory interpretations of (III) include regulation of outputs, prices and prots in a region by regulating conditions of entry of exports and imports into spatially separated markets.

5. A production oriented application Problem (IV) extends (IIIa)* by introducing an explicit distinction between demand related variables and targets yjr , yjr and supply variables and targets xjr , x for products j 1; 2; . . . ; n in regions r 1; 2; . . . ; R jr and also augmenting (IIIa)* with corresponding regional and interregional supply and demand conditions and regionally dependent intermediate output related coecients bjir as well as interregional transportation links (rs; sr) 2 Rr and associated input output coecients bikrs , biks r . (Here Rr contains links rs and sr between region r and contiguous regions s. For a more comprehensive treatment of the endogenisation of transport routes and links, see Ryan (1992)): " R n X Xh max f y1r ; yjr ; . . . ; ynR djr yjr djr yjr
r1 j1

s:t: xjr xjr

n X j1

e x jr jr

e x r jr

m X i1

# c s ir ir c s ir ir

yjr 6 xjr j 1; 2; . . . ; n; r 1; 2; . . . ; R X
sr2Rr

yjr yjr yjr yjr ;

x jr n X
j1

x jr

x jr X x js r xjrs bjirs xjrs

IV

xjrr

rs2Rr

ajir xjrr

X
rs2Rr

bjirs xjs r

X
sr2Rr

s sir b ; all variables are nonnegative ir ir If f y1r ; yjr ; . . . ; ynR are concave then associating dual variables njr , Dpjr , wjr , ujr , lir with the constraints of (IV), the KuhnTucker conditions are njr Dpjr P df y1r ; yjr ; . . . ; ynR =dyjr njr wjr 6 ujr m X ujr 6 lir bjir
i1

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M.J. Ryan / European Journal of Operational Research 152 (2004) 5671

m X X

ujr ujs 6

lir bjirs i1 rs2Rr djr 6 Dpjr 6 djr e 6 wjr 6 e jr jr cir 6 lir 6 cir ujr unrestricted

IV in sign

Programs (IV) and (IV)0 are nonlinear and spatial generalisations of (III), (IIIa) with df y1r ; yjr ; . . . ; ynR = dyjr and njr being marginal revenue and marginal supply cost for product type j in region r, and Dpjr and wjr potentially corresponding, via the fth and sixth constraints of (V)0 and complementary slackness, to demand and supply related taxes or subsidies. The second constraints imply the optimal rule: supply output j in region r, if at all, then to the point where net marginal supply cost (njr wjr ) recoups the marginal costs ujr of supplying that commodity in that P region. The third constraints in turn relate marginal costs ujr to marginal costs of inputs to production lIr bjIr . Finally, the fourth constraints of (IV)0 require that a commodity is optimally shipped from region r to region s, if at all, then only to the point where marginal supply price in region s is sucient to recoup the marginal supply price in region r plus the marginal variable and capital shipment costs. (This is a regulated production related generalisation of the necessary conditions for spatial competition in the noncompetitive case. It requires that for any pair of optimally connected markets destination price equate to origin price plus unit shipping cost.) In (IV) and (IV)0 competition may arise in either or both of two ways: through potential entry of an identical commodity from a dierent region and through potential competition for resources. In the rst way competition would arise if markets were such that any prospect of superprot inevitably led to entry of a perfect substitute to be sold at normal prot from at least one other market. In the second, assuming that necessary inputs were available in a region (through local production or import), factors would be mobile between uses in such a way that production of type j would optimally displace production of other types i (and vice versa) to the point where marginal revenues exactly recoup marginal variable and capacity related expenses of production in that region. 6. Generalised economies of scale and scope: a motivating example Prior to considering economies of scale and scope for nonlinear cases with production and explicit regulation a simple example with reference to the distribution model will be helpful. The distribution model and its dual can be expressed in general as m n XX min cij xij
n X j1 m X i1 i1 j1

xij ai ; xij bj ;
m X i1 m X i1

i 1; 2; . . . ; m V j 1; 2; . . . ; n ai
n X j1 n X j1

xij P 0;

bj

max

R i ai

K j bj

Ri Kj 6 cij ;

i 1; . . . ; m; j 1; 2; . . . ; n

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Ri , Kj unrestricted in sign. Since the constraints of (V) are linearly dependent, at most m n 1 positive shipments will constitute an extreme point optimum for that system. An implication of that fact is that one of the dual variables Ri , Kj may be chosen arbitrarily (e.g. the value R1 0 in Table 1 below). The more for less case can be illustrated by the two origin two destination example in Table 1 (with cij in the top left hand corners of the cells). Clearly the values xij in Table 1 constitute a feasible solution to problem (V) which connects origins and markets. At the same time the dual values Ri , Kj in Table 1 constitute a feasible solution to (V) so that, by the dual theorem, these solutions together constitute optimal solutions to (V) and (V)0 . Further, in this example cell {2,1} exhibits the more for less paradox since R2 K1 2 < 0. In this case with R2 6 and K1 4 total shipping cost can be decreased by 2 units if a2 is increased by 1 unit and b1 is increased by 1 unit. In the present context a useful interpretation of the more for less phenomenon is that illustrated in Fig. 1. In Fig. 1 the origins and destinations are, say, a Canadian factory and market A1 , B1 and a South American factory and market A2 , B2 . With data as in Table 1 implicitly the nondegenerate optimal solution to (V) requires the cross country shipment x12 > 0. More generally any nondegenerate solution to (V) will connect all origins and destinations via a basis, even though that may require relatively expensive cross country shipments and thereby exhibit the potential for more for less or for more for nothing solutions. In this case c11 c22 < c12 . It follows that, if demand at market 1 increased by d and supply at factory 2 increased by d then, for d 6 5 overall shipping cost could be reduced by 2d units by reducing cross country shipments accordingly. (If d 5 the optimal solution becomes degenerate and decomposablea connected system of factories and markets become disconnected into two disjoint subsystems.) In that case overall output at factory 2 would increase while overall (shipping) cost fell. That is: a species of location specic economies of scale would obtain.
Table 1 Optimal solution of a two-origin two-destination problem

Fig. 1. Illustration of cross country shipments.

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Summarizing: Even in the case of the distribution problem, circumstances can arise in which, given a certain pattern of supplies and demands, connectedness of markets will be preferable to nonconnectness since potentially generating economies of scope. But, as this numerical example demonstrates, for suciently large changes in existing patterns of demand, economies of scope stemming from opportunities for relatively advantageous exports, may in turn be advantageously oset at least in part by an increased scale of operation of factories in the destination market. These remarks immediately suggest extensions to production and regulation related more for less and more for nothing cases and associated denitions of economies of scope and of scale.

7. Production related economies of scope Production related economies of scope can be dened via extensions of (IV) as in Theorem 4 according to which initially spatially disconnected markets may optimally become spatially connected. (The denition implicit in Theorem 4 diers from that of Baumol et al. (1982, p. 71) viz.: Cy1 ; y2 < Cy1 Cy2 , where y1 is output of rm 1 and y2 is output of rm 2. Specically Baumol, Panzar and Willig focus on cost and do not explicitly consider demand or refer to spatially distinct inputs and products. By contrast the focus here is on demand as well as cost related implications of potentially connecting otherwise unconnected markets.) Theorem 4. If M are of nonArchimedean order and with interpretations for the remaining quantities as in (IV) so that cjs r ( M and/or cjrs ( M at least one rs, rs 2 Rr, then " " R n X X max f y1r ; yjr ; . . . ; ynR djr yjr djr yjr
r1 j1

e x e x jr jr r jr
m X i1

X
Sr2Rr

# Mxjs r Mxjrs VI

c s c s ir ir ir ir

s:t: constraints of IV 6 max " " R n X X

r1 j1 f y1r ; yjr ; . . . ; ynR djr yjr djr yjr

e x e x jr jr r jr
m X i1

X
Sr2Rr

# ejs r xjs r ejrs xjrs VIa

c s c s ir ir ir ir

s:t: constraints of IV Proof (Similar to that for Theorem 3). Any feasible solution to (VI) is a feasible solution to (VIa), but not conversely. Thus any optimal solution to (VI) is a feasible but not necessarily an optimal solution to (VIa). It follows that z 6 z0 .

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Notice that via potential subsidies or taris ejrs , ejs r (VI), (VIa) correspond to potentially regulated interregional transport related extensions of (IV). Conversely, one class of optimal solutions to (IV) are consistent with optimal solutions to (VI) with xjrs xjs r 0 all rs, sr 2 Rr. (Such conditions imply production and market monopoly in each region.) More generally optimal solutions to (IV) are consistent with optimal solutions to (VIa) with ejrs , ejs r 0 in (VIa) for all routes for which optimally xjrs > 0, xjs r > 0 in (IV). In this way economies of scope may arise in a multiregion economy with production when hitherto unavailable, or untaken, shipping opportunities become available via sucient reductions in one or more relevant regulatory taris (increases in one or more regulatory subsidies) ejrs , ejs r shipping costs. Conditions with preemptively large weights M, as in (VI), may be used to model conditions of prohibitively large potential taris and so of conditions under which there would certainly be no interregional shipments connecting subsets r2 , s2 . Then, if one or more such weights is suciently reduced (i.e becomes suciently nonpreemptively large), to that extent, economies of scope may become available. (Notice that (IV) is a special case of (VIa) with r2 , s2 empty.)

8. Production related economies of scale Production related economies of scale via programs (VII), (VIIa) generalise the more for less (nothing) cases in the distribution model and arise for these more general production related cases when it becomes possible to increase the total amount shipped from at least one origin and to at least one destination in such a way that total shipping costs are reduced (resp unchanged), even though shipping costs are all positive and economies of scope are not obtained. (Again, by contrast with Baumol et al. (1982), the focus here is on spatially related aspects of economies of scale. With reference to product specic economies of scale on page 67 of their book those authors consider dierences in cost under conditions with and without a particular product. This is analogous to cases here for which marginal revenues df yjr =dyjr are constant 0 in the relevant ranges and for which djr , c are preemptively large vis--vis djr , c0 in Theorem 5.) a jr jr
0 Theorem 5. With interpretations as in Theorem 4 and if djr < djr , e0 < e some jr then jr jr " " R n X X max f y1r ; yjr ; . . . ; ynR djr yjr djr yjr r1 j1 # X ejr xjr er xjr ejs r xjs r ejrs xjrs rs;sr2Rr # m X c s c s ir ir ir ir i1

VII

s:t: constraints of IV z 6 z0 " " R n X X 0 max f y1r ; yjr ; . . . ; ynR djr yjr djr yjr r1 j1 # X 0 ejr xjr er xjr ejs r xjs r ejrs xjrs rs;sr2Rr # m X cir sir cir sir
i1

VIIa

s:t: constraints of IV

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Proof (Similar to that for Theorem 3). Any feasible solution to (VII) is a feasible solution to (VIIa). In particular any optimal solution to (VII) is a feasible but not necessarily an optimal solution to (VIIa). It follows that z 6 z0 . In this context cost economies of scale for a single product can be understood as arising inter alia in cases 0 in which demand and supply changes, respectively via djr vis--via djr and e vis--vis e0 , are restricted to a a a jr jr single product j and market r with marginal revenue df y1r ; yjr ; . . . ; ynR =dyjr constant at that margin. In such cases marginal cost may fall due to varying uses of dierent processes in response to increasing aggregate demands and supplies of product j to market r. In eect the regional mix of sources of supply of product i to region r will be scale dependent in such a way as to generate either equal or reduced overall costs and thence fallingand even possibly negativemarginal cost for output j in region r. 9. Generalised production related economies of scale and scope It has been shown how the generalized goal programming model in (IV) may be used to comprehend economies of scope using (VI) and (VIa) and of scale using (VII) and (VIIa) respectively in conjunction with Theorems 4 and 5. Now notice that, those conditions of economies of scale and/or of scope can be generalized by using program (VIIa) instead of program (VIa) in Theorem 4, in that way comprehending the possibility of the simultaneous incidence of these two classes of conditions to yield generalised economies of scale and scope related results. (I am grateful to a referee for the observation that the simultaneous consideration of economies of scale and of scope played a crucial role in the decision to break up Bell Telephone in the US (for more on this see Evans and Heckman (1984)).) 10. Some competitive and noncompetitive interpretations P If f y1r ; yjr ; . . . ; ynR def pjr yjr then, via f 0 y1r ; yjr ; . . . ; ynR def pir , (IV) becomes identical to a linear system with constant demand prices. Nonlinear possibilities include nonlinear revenue orP R surplus maxiP mizing specications with f y1r ; yjr ; . . . ; ynR def pjr yjr yjr or f y1r ; yjr ; . . . ; ynR def pjr yjr dyjr , where market prices vary with quantities demanded and the range of integration is from zero to the op timising levels of demand yjr . Programs (IV) and (IV)0 then respectively yield a supernormal prot related interpretation and a generalised form of the consumers and producers surplus objective considered by Samuelson (1952) for cases without production or regulation. For these and any other instances in which the functions f y1r ; yjr ; . . . ; ynR are concave, (IV) corresponds to a concave programming problem and the KuhnTucker conditions are necessary and sucient for optimality as in (IV)0 . The substantive dierence between linear and nonlinear interpretations of (IV)0 is in the terms dy1r ; yjr ; . . . ; ynR =dyjr of the rst constraints in (IV)0 . These generalise a familiar type of prot maximising optimality condition namely that, at an overall optimum, enterprises (if producing at all) would produce to the point where net marginal revenues from sales of commodities j in region r df y1r ; yjr ; . . . ; ynR =dyjr Dpjr equate to marginal supply costs ujr for those commodities in those regions. Here these conditions are potentially regulated (via Dpjr ) and explicitly multiproduct and explicitly space related, whereas the more familiar equation of marginal revenues and marginal costs as preconditions for prot maximisation conditions relate P R to single products and unregulated spaceless economies. With f y1r ; yjr ; . . . ; ynR def pjr yjr dyjr in (IV) at an optimum the rst constraints of (IV)0 take the form pjr Dpjr njr . These conditions P consistent with a regulated linear specication of (IV). More are generally, with f y1r ; yjr ; . . . ; ynR def pjr yjr yjr (IV) is also consistent with a regulated nonlinear specication. For yjr > 0 the rst constraint of (IV)0 would then have the structure pjr yjr dpyjr = dyjr Dpjr njr . As a special case, if conditions obtain as if identically yjr dpyjr =dyjr Dpjr 0 for all

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consumption commodities, these latter conditions are regulated variants in this more general setting of the standard zero supernormal prot and/or free entry conditions of competition. That is, in this framework both competitive and consumers and producers surplus maximisation results are special cases of a more general regulated noncompetitive analysis in which rms potentially make supernormal prots. Not only does (IV) potentially specialise in these ways to familiar forms of competitive equilibrium and free entry cases but, as has already been stressed, (IV)0 , its dual, also embodies contingent regulatory variables which in turn have interpretations as contingent regulatory tax and subsidy related variants of competitive or noncompetitive MR MC prot maximising optimality conditions. More fundamentally, in (IV)0 variables Dpjr , via c , have potential interpretations in relation to opportunities to generate (or to jr inhibit) potential for economies of scale. Also, through ejs r , ejrs and extensions via (Va), program (IV) incorporates potential interpretations in relation to economies of scope. In short (IV) and (IV)0 and straightforward extensions of them include regulated competitive and consumers and producers surplus maximising cases as special cases within a more general regulated economies of scope and scale oriented noncompetitive formulation.

11. Monopoly, oligopoly and contestability It has been shown how (IV), which relates to potentially connected markets, may be consistent variously with spatial competition and spatial monopoly under conditions as if identically pjr ujr constant. But, even in the absence of market determined easy entry conditions, regulatory penalties Dpjr yjr dpyjr =dyjr may be selected so that optimally pjr yjr dpyjr =dyjr Dpjr pjr ujr . More generally, regulatory variables Dpjr , wjr , and the economies of scope related quantities ejrs , ejs r which were introduced in (VII), (VIIa) may be used variously to control rates of entry of rms into new markets and realised economies of scale and scope. When modied as in the previous paragraph to include economies of scope related quantities ejrs , ejsr into (IV) the fourth constraints of (IV)0 , which correspond to interregional shipments, become ujr ujs 6
n X X i1 rs2Rr

lirs bjirs ejrs

with these modications potential competition relative to product j in region r may come about through (IV), (IV)0 in any or all of three distinct ways, viz.: through relatively easy, impeded or blockaded entry (in the terminology of Bain (1956) for imports of an identical commodity from one or more other regions; through competition for resources from other potential users of inputs to production of other commodities i in region r, entry or exit of supplies i into markets r would occur up to the point where rates of prot for all outputs in all regions are maximised in a manner consistent with the contingent regulatory environment for those products and regions; with a slight modication so that it includes sums of outputs j in each region r, (IV) could also generate a type of potential entry with the sense of free entry from producers of perfect substitutes within region r. (This corresponds to a case in which transportation costs are zero for the import of that product from an appropriately designated contiguous region.) An automobile related example will help here: potential competition for the output of a plant producing a particular type of vehicle j in region r might come about respectively via imports of identical vehicles of that type from one or more other regions s, by competition from producers of other products in region r for

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inputs to production (e.g. competition for labour inputs) and, from production from one or more further plants located in region r and also producing vehicles of type j. Any or all of these three types of potential competition are consistent with the special case of free entry for all products in all markets in an explicitly nonregulatory environment through conditions as if identically Dpjr wjr ejs r ejrs 0 as follows: For imported and exported commodities j (e.g. automobiles) in region r X xjrs > 0 ) ujr ujs lir bjirs 2 xjs r > 0 ) ujr ujs X lis bjis r 3

For products via inputs k to outputs m, n in region r X bmir bnir lir xmr ; xnr > 0 ) umr unr Finally, if there are two perfect substitutes j1 , j2 of type j in region r xjr xj1r xj2r ; and xj1r ; xi2jr > 0 ) uj1r uj2r ujr pjr :
0

But (2)(5), which are unregulated special cases generated via (IV), (IV) and (VIa) with the additional assumption that all regulatory variables are optimally zero, are most unlikely to be simultaneously appropriate to any region of any real world economy because of the signicance in practice of economies of scale and scope as potential barriers to entry. Summarising: With conditions as if all Dpjr wjr ejs r ejrs 0 all j, r, s then (IV), (IV)0 , when extended via (VIa), are potentially interregionally unregulated conditions consistent with conditions of spatial competition, namely conditions of market connectivity, no superprot and easy entry. At the other extreme with one or more of Dpir , wir , ejs r , ejrs 6 0, interregional extensions of (IV), (IV)0 via (VIa) are also potentially consistent with isolated markets and superprots and more generally with blockaded entry and single plant spatial monopoly. In these connections, if some or all of ejs r , ejrs are suciently large, intermarket shipments of commodities xjs r will be precluded, as will the generation of advantages potentially stemming from multiplant operation in a subset of markets, as well as advantages of economies of scale and scope more generally. In addition to potential competition and monopoly (IV), (IV)0 and extensions via (VIa), (VIIa) include various oligopolistic interpretations as special cases. In that connection economies of scale and scope are potentially highly relevant both in the determination of levels of barriers to entry of new rms and/or as explanations of relative growth rates of existing rms. So too are implications of potential entry by relatively diversied rms (cf the empirical ndings respectively of Bain (1956) and Strickland and Weiss (1976)). By focusing attention on conditions of entry (in Bains terminology) and post entry conjectures for supply by an additional producer of a product to a market possibly already supplied by one or more other producers, (IV) and (IV)0 capture all of these features. They are open to a variety of interpretations with reference to pure and dierentiated oligopoly with or without potential entry, e.g. with reference to the production and/or marketing of particular types of automobile. But they also specialise to conform to more specic oligopolistic conjectures. For example, by introducing origin and destination specic export goals for variables xirs and associated (preemptively negative) marginal rewards and penalties, these goals become consistent with conditionally prot oriented Cournot or market sharing types of conjecture by rms inside a market j in region r with reference to s remaining oligopolistic suppliers from regions s outside it. (Here, by contrast, for example, with work by Dafermos and Nagurney (1987) on spatial oligopoly, not only is regulation goal oriented and essentially endogenous: so is the number of rms concerned.)

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More subtly (IV), (IV)0 and extensions via (VIa), (VIIa) can generalise interpretations and results both to oligopolistic markets and to spatial price discrimination of a kind considered for more restricted types of spatial oligopolistic model by Eaton and Wooders (1985) and Norman and Thisse (1996). Specically Norman and Thisse, use a much simplied model of spatially dierentiated oligopoly to distinguish between mill price based soft and discriminatory tough pricing regimes. They conclude that: the greater competitiveness of discriminatory pricing leads to less product variety than mill pricing no matter the degree of spatial contestability. (Norman and Thisse, 1996, p. 79.) Their conditions are analogous to simplications of the more comprehensive interregional pricing conditions (6)(9). For imported and exported commodities j in region r: X xjrs > 0 ) ujr ujs lir bjirs ejrs 6 xjs r > 0 ) ujr ujs X lis bjis r ejs r 7

For products via inputs k to outputs m; n in region r: X bmir bnir lir xmr ; xnr > 0 ) umr unr wmr wnr Finally, if there are two perfect substitutes j1 , j2 of type j in region r: xjr xj1r xj2r ; and xj1r ; xi2jr > 0 ) uj1r uj2r ujr pjr :

For Norman and Thisse a soft regulatory regime is mill price based with demand price in region s equating to unit production cost in region plus unit interregional transport cost. Such conditions correspond to a restricted form of (6)(9) and conditions as if identically Dpjr wjr ejs r cjrs 0. A tough regulatory regime for Norman and Thisse is one in which rms might reduce prices of commodities exported for sale in other regions up to the point where those prices are only sucient to cover marginal transportation costs. Such tough cases can readily be accommodated by interpreting weights cjsr , cjrs in conditions (6)(9) as potentially corresponding to destination specic subsidies which might in eect cancel all of the initial acquisition cost. In these ways models in this paper not only capture essential features of Norman and Thisses model but do so with the context of a more comprehensive endogenous production oriented framework. At least with reference to overall numbers of suppliers of commodity j their conclusion, which is that the greater competitiveness of discriminatory pricing leads to less product variety than mill prices, carries over here too. Indeed by conditions (6) and complementary slackness, if ejs r < 0, the fact that exporting enterprises will be more easily able to extinguish producers in destination markets is a direct implication of the present analysis of economies of scale and scope. Here the analogue of conditions of contestability/noncontestability, which in Norman and Thisses model pertain to xedness/nonxedness of production capacity, is the existence or otherwise of eective entry and exit barriers stemming from xed endowments b in (IV). If conditions are such ir that, via the associated dual variables lir , normal prots alone may be made from factors i, i 1; 2; . . . ; i , then such markets are contestable whereas, if xed factors together with regulatory conditions lead to nonnormal prots and so to eective entry or exit barriers, contestability conditions would not obtain. In this context a strong feature of the present analytical framework is that it not only comprehends circumstances in which product variety and variously contestable and noncontestable conditions may hold at an optimum, it also comprehends cases in which, through appropriate consumption, production or exchange related taxes or subsidies, governments may regulate otherwise distortive inuences, including those of natural monopoly (for factors i and/or for products j in one or more regions r), product dierentiation and economies of scale and scope, so as, in eect, to obtain conditions of contestability by suitably regulating conditions including (6)(9). (Incidentally Norman and Thisse assume increasing returns to scale throughout their analysis. No such restrictive assumption has been made here.)

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12. Conclusion I close by noting various ways in which the goal programming models and applications that have been developed here could be extended and generalised. Clearly these scale and scope related analyses and interpretations could be extended to multiperiod systems with explicitly nonlinear constraints as well as nonlinear objectives. In such systems the optimality conditions may be such that the identities of importing and of exporting regions for any given commodity would vary over time as well as with variations in prevailing regulatory regimes. Further, both linear and nonlinear specications could also be generalised to include specic interregional and/or multiregional trade related goals, taxes and subsidies and/or resource utilisation related goals taxes and subsidies. (For developments along these lines see Ryan (1992).) In that context it is signicant that in practice goals and associated contingent taxes or subsidies may conict. For example, with reference to (IV) and (IV)0 in Section 5 supply related taxes or subsidies wjr may conict with demand related taxes and subsidies Dpjr . Similarly interregional and multiregional taxes and subsidies may conict with local ones, for example in the sense of a European tax oset by a national subsidy to one or more types of input i or products j. In every case the corresponding optimal solutions would then yield implications for the net eects of multilevel regulatory regimes.

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