A multiplicative method for estimating the potential gains from two-stage production system mergers

In this study, a data envelopment analysis-based approach is proposed for estimating and decomposing the potential gains from the horizontal integrations of two-stage production systems. In the first tier, the gains of the potential merger are measured by a composite efficiency index. The potential efficiency gains are then decomposed as the product of coordination efficiency and two divisional potential efficiency gains. In the second tier, the divisional potential efficiency gains are decomposed into scope, size, and learning efficiencies. We develop a multiplicative framework for decomposing potential efficiency gain in mergers of the two-stage production systems, and the coordination efficiency is considered. In the case study of commercial banks in mainland China, we develop an algorithm for estimating and decomposing potential efficiency gain for a two-stage bank production system.