Capacity utilisation and profitability: a decomposition of short run profit efficiency
AbstractThe principal aim of this paper is to measure the amount by which the profit of a multi-input, multi-output firm deviates from maximum short-run profit, and then to decompose this profit gap into components that are of practical use to managers. In particular, our interest is in the measurement of the contribution of unused capacity, along with measures of technical inefficiency, and allocative inefficiency, in this profit gap. We survey existing definitions of capacity and, after discussing their shortcomings, we propose a new ray economic capacity measure that involves short-run profit maximisation, with the output mix held constant. We go on to describe how the gap between observed profit and maximum profit can be calculated and decomposed using linear programming methods. The paper concludes with an empirical illustration, involving data on 28 international airline companies. The empirical results indicate that these airline companies achieve profit levels which are on average US$815m below potential levels, and that 70% of the gap may be attributed to unused capacity.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2001052.
Date of creation: 00 Nov 2001
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capacity utilisation; proﬁt decomposition; technical efficiency; allocative efficiency;
Other versions of this item:
- Coelli, Tim & Grifell-Tatje, Emili & Perelman, Sergio, 2002. "Capacity utilisation and profitability: A decomposition of short-run profit efficiency," International Journal of Production Economics, Elsevier, vol. 79(3), pages 261-278, October.
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- Berndt, Ernst R & Morrison, Catherine J, 1981. "Capacity Utilization Measures: Underlying Economic Theory and an Alternative Approach," American Economic Review, American Economic Association, vol. 71(2), pages 48-52, May.
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CORE Discussion Papers RP
-1132, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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- TULKENS, Henry & VANDEN EECKAUT, Philippe, 1993. "Non-Parametric Efficiency, Progress and Regress Measures for Panel Data : Methodological Aspects," CORE Discussion Papers 1993016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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- Gold, Bela, 1973. "Technology, productivity and economic analysis," Omega, Elsevier, vol. 1(1), pages 5-24, February.
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- Fare, Rolf & Grosskopf, Shawna & Kokkelenberg, Edward C, 1989. "Measuring Plant Capacity, Utilization and Technical Change: A Nonparametric Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 655-66, August.
- Lawrence R. Klein, 1958. "The Measurement of Capacity," Cowles Foundation Discussion Papers 49, Cowles Foundation for Research in Economics, Yale University.
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