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

  • Oh, Inha
  • Lee, Jeong-Dong

    ()

    (Seoul National University)

  • Hwang, Seogwon
  • Heshmati, Almas

    (Ratio)

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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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.
Contact details of provider: Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
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Fax: 08-441 59 29
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  1. 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.
  2. 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.
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  17. Pekka Korhonen & Mikko Syrjänen, 2005. "On the Interpretation of Value Efficiency," Journal of Productivity Analysis, Springer, vol. 24(2), pages 197-201, October.
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