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A method to analyze profit differential between firms

Author

Listed:
  • Jean-Philippe Boussemart

    (University of Lille 3 and IESEG School of Management (LEM-CNRS))

  • Benoît Demil

    (University of Lille 1 (IAE), LEM (UMR 8179))

  • Aude Deville

    (University of Nice Sophia-Antipolis, IAE de Nice, GRM)

  • Olivier de la Villarmois

    (University of Lille 1 (IAE), LEM (UMR 8179))

  • Xavier Lecocq

    (University of Lille 1 (IAE) and IÉSEG School of Management, LEM (UMR 8179))

  • Hervé Leleu

    (CNRS-LEM and IESEG School of Management)

Abstract

A rather simple but crucial question in economics and management is why one firm makes more profit than another. However the answer remains unclear because of the large range of factors that might explain differential profit. In this paper we propose a decomposition of the profit differential between two firms by considering separately volume and price effects. On the volume side, we identify factors related to differences in management efficiency (technical and allocative), dominance of one firm technology over the other (productivity gaps) and size differences. On the price side, price differences among inputs and outputs prices explained by competitive advantages can also explain a big part of the profit gap. Our analysis encompasses a spatial framework where profits of two different firms are compared or a time framework by comparing profits of the same firm at two different dates. We first motivate the decomposition from a theoretical point of view and we next propose a practical and operational measure of each component based on Bennet indices. Profit differences are value measures (in money) which can be split into price and volume effects by economic indices. Individual component of the decomposition are analyzed and computed independently in a bottom-up approach before we finally show that the sum of all components allows recovering the full profit differential between two firms.

Suggested Citation

  • Jean-Philippe Boussemart & Benoît Demil & Aude Deville & Olivier de la Villarmois & Xavier Lecocq & Hervé Leleu, 2013. "A method to analyze profit differential between firms," Working Papers 2013-ECO-01, IESEG School of Management.
    • Handle: RePEc:ies:wpaper:e201301
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    References listed on IDEAS

    as
    1. Agrell, Per J. & Martin West, B., 2001. "A caveat on the measurement of productive efficiency," International Journal of Production Economics, Elsevier, vol. 69(1), pages 1-14, January.
    2. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
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    4. W. Erwin Diewert, 2005. "Index Number Theory Using Differences Rather Than Ratios," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 311-360, January.
    5. B. Demil & X. Lecocq, 2010. "Business model evolution : in search of dynamic consistency," Post-Print hal-00572915, HAL.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Profit; Profit Decomposition; Managerial Efficiency; Size Efficiency; Bennet Index; Price Index;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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