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Analysis of Product Efficiency in the Korean Automobile Market from a Consumer’s Perspective

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Author Info

  • Oh, Inha
  • Lee, Jeong-Dong

    ()
    (Seoul National University)

  • Hwang, Seogwon
  • Heshmati, Almas

    (Ratio)

Abstract

A product is called technically inefficient when it has higher price and/or lower quality than others. Technical inefficiency of product has been conceptualized since Lancaster (1966), and empirically measured by many researchers, for example, Fernandez-Castro and Smith (2002) and Lee et al. (2005) among others. If we know further the information about structure of utility function, allocative inefficiency can also be measured. Even though a product is technically efficient with highest quality together with lowest price, it could not be chosen in the market, if it cannot match the preference structure of consumers, i.e. it is allocatively inefficient. This study poses a conceptual and methodological framework to measure technical and allocative efficiency at the product level considering consumer’s choice, which comprises the overall efficiency. Empirically we combine Data Envelopment Analysis (DEA) and discrete choice model to measure the level of inefficiencies. The suggested framework is applied to the Korean automobile market. The relationship between the level of efficiency and market performance in terms of market share is discussed.

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Bibliographic Info

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 95.

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Length: 28 pages
Date of creation: 25 Apr 2006
Date of revision:
Handle: RePEc:hhs:ratioi:0095

Note: Forthcoming i Empirical Economics.
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Keywords: DEA; Product Efficiency; Consumers Utility; Automobile Market; Korea;

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References

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  1. Ley, Eduardo & Steel, Mark F J, 1996. "On the Estimation of Demand Systems through Consumption Efficiency," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 539-43, August.
  2. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387.
  3. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  4. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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  7. Christos Papahristodoulou, 1997. "A DEA model to evaluate car efficiency," Applied Economics, Taylor & Francis Journals, vol. 29(11), pages 1493-1508.
  8. Wojcik, Charlotte, 2001. "Learning by Consumers in the Demand for Japanese Cars," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 94-107, February.
  9. De Borger, Bruno & Kerstens, Kristiaan, 1996. "Cost efficiency of Belgian local governments: A comparative analysis of FDH, DEA, and econometric approaches," Regional Science and Urban Economics, Elsevier, vol. 26(2), pages 145-170, April.
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  11. Merja Halme & Tarja Joro & Pekka Korhonen & Seppo Salo & Jyrki Wallenius, 1999. "A Value Efficiency Approach to Incorporating Preference Information in Data Envelopment Analysis," Management Science, INFORMS, vol. 45(1), pages 103-115, January.
  12. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November.
  13. Pekka Korhonen & Mikko Syrjänen, 2005. "On the Interpretation of Value Efficiency," Journal of Productivity Analysis, Springer, vol. 24(2), pages 197-201, October.
  14. M. Halme & T. Joro & P. Korhonen & S. Salo & J. Wallenius, 1998. "Value Efficiency Analysis for Incorporating Preference Information in Data Envelopment Analysis," Working Papers ir98054, International Institute for Applied Systems Analysis.
  15. Angel S. Fernandez-Castro & Peter C. Smith, 2002. "Lancaster's characteristics approach revisited: product selection using non-parametric methods," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 83-91.
  16. Lee, Jeongdong & Repkine, Alexandre & Hwang, Seogwon & Kim, Taiyoo, 2004. "Estimating Consumers’ Willingness to Pay for the Individual Quality Attributes with DEA," MPRA Paper 7848, University Library of Munich, Germany.
  17. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
  18. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
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Cited by:
  1. Uwe Cantner & Jens J. Krüger & René Söllner, 2012. "Product quality, product price, and share dynamics in the German compact car market," Industrial and Corporate Change, Oxford University Press, vol. 21(5), pages 1085-1115, October.
  2. Voltes-Dorta, Augusto & Perdiguero, Jordi & Jiménez, Juan Luis, 2013. "Are car manufacturers on the way to reduce CO2 emissions?: A DEA approach," Energy Economics, Elsevier, vol. 38(C), pages 77-86.

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