IDEAS home Printed from https://ideas.repec.org/p/oeg/wpaper/2002-01.html
   My bibliography  Save this paper

Capacity Utilization and Profitability: A Decomposition of Short Run Profit Efficiency

Author

Listed:
  • Coelli, Tim
  • Grifell-Tatje, Emili
  • Perelman, Sergio

Abstract

The 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.

Suggested Citation

  • Coelli, Tim & Grifell-Tatje, Emili & Perelman, Sergio, 2002. "Capacity Utilization and Profitability: A Decomposition of Short Run Profit Efficiency," Efficiency Series Papers 2002/01, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
  • Handle: RePEc:oeg:wpaper:2002/01
    as

    Download full text from publisher

    File URL: https://www.unioviedo.es/oeg/ESP/esp_2002_01.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eilon, Samuel, 1975. "Changes in profitability components," Omega, Elsevier, vol. 3(3), pages 353-354, June.
    2. Eilon, Samuel & Teague, Judith, 1973. "On measures of productivity," Omega, Elsevier, vol. 1(5), pages 565-576, October.
    3. Winston, Gordon C, 1974. "The Theory of Capital Utilization and Idleness," Journal of Economic Literature, American Economic Association, vol. 12(4), pages 1301-1320, December.
    4. Tulkens, Henry & Vanden Eeckaut, Philippe, 1995. "Non-parametric efficiency, progress and regress measures for panel data: Methodological aspects," European Journal of Operational Research, Elsevier, vol. 80(3), pages 474-499, February.
    5. Tim Coelli & Sergio Perelman & Elliot Romano, 1999. "Accounting for Environmental Influences in Stochastic Frontier Models: With Application to International Airlines," Journal of Productivity Analysis, Springer, vol. 11(3), pages 251-273, June.
    6. 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.
    7. 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 655-666, August.
    8. Eilon, S & Gold, Bela & Soesan, Judith, 1975. "A productivity study in a chemical plant," Omega, Elsevier, vol. 3(3), pages 329-343, June.
    9. Gold, Bela, 1973. "Technology, productivity and economic analysis," Omega, Elsevier, vol. 1(1), pages 5-24, February.
    10. Lawrence R. Klein, 1958. "The Measurement of Capacity," Cowles Foundation Discussion Papers 49, Cowles Foundation for Research in Economics, Yale University.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sahoo, Biresh K. & Tone, Kaoru, 2009. "Decomposing capacity utilization in data envelopment analysis: An application to banks in India," European Journal of Operational Research, Elsevier, vol. 195(2), pages 575-594, June.
    2. James Kirkley & Catherine Morrison Paul & Dale Squires, 2002. "Capacity and Capacity Utilization in Common-pool Resource Industries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 71-97, June.
    3. Bruno De Borger & Kristiaan Kerstens & Diego Prior & Ignace Van de Woestyne, 2013. "Static efficiency decompositions and capacity utilization: integrating economic and technical capacity notions," Applied Economics, Taylor & Francis Journals, vol. 45(24), pages 3529-3529, August.
    4. Subhash C. Ray & Kankana Mukherjee & Yanna Wu, 2006. "Direct And Indirect Measures Of Capacity Utilization: A Non‐Parametric Analysis Of Us Manufacturing," Manchester School, University of Manchester, vol. 74(4), pages 526-548, July.
    5. Sarba Priya Ray, 2011. "Economic Efficiency in Indian Rubber Industry," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 5(4), December.
    6. Michalis Nikiforos, 2012. "On the Utilization Controversy: A Theoretical and Empirical Discussion of the Kaleckian Model of Growth and Distribution," Economics Working Paper Archive wp_739, Levy Economics Institute.
    7. Kirkley, James E & Squires, Dale, 1999. "Capacity and Capacity Utilization in Fishing Industries," University of California at San Diego, Economics Working Paper Series qt6k91b50v, Department of Economics, UC San Diego.
    8. E. Grifell-Tatjé & C. A. K. Lovell, 1999. "Profits and Productivity," Management Science, INFORMS, vol. 45(9), pages 1177-1193, September.
    9. Chen, Zhenling & Zhang, Xiaoling & Ni, Guohua, 2020. "Decomposing capacity utilization under carbon dioxide emissions reduction constraints in data envelopment analysis: An application to Chinese regions," Energy Policy, Elsevier, vol. 139(C).
    10. E. Grifell-Tatjé & C. Lovell, 2014. "Productivity, price recovery, capacity constraints and their financial consequences," Journal of Productivity Analysis, Springer, vol. 41(1), pages 3-17, February.
    11. Arnab Deb, 2013. "Economic Reforms, Capacity Utilization, and Productivity Growth in Indian Manufacturing," Alumni working papers 2013-05, University of Connecticut, Department of Economics.
    12. E. Abdul Azeez, 2002. "Economic reforms and industrial performance: An analysis of capacity utilisation in Indian manufacturing," Centre for Development Studies, Trivendrum Working Papers 334, Centre for Development Studies, Trivendrum, India.
    13. Yu, Ming-Miin & Chang, Yu-Chun & Chen, Li-Hsueh, 2016. "Measurement of airlines’ capacity utilization and cost gap: Evidence from low-cost carriers," Journal of Air Transport Management, Elsevier, vol. 53(C), pages 186-198.
    14. Lindebo, Erik & Hoff, Ayoe & Vestergaard, Niels, 2007. "Revenue-based capacity utilisation measures and decomposition: The case of Danish North Sea trawlers," European Journal of Operational Research, Elsevier, vol. 180(1), pages 215-227, July.
    15. W. Erwin Diewert & Kevin J. Fox, 2018. "A decomposition of US business sector TFP growth into technical progress and cost efficiency components," Journal of Productivity Analysis, Springer, vol. 50(1), pages 71-84, October.
    16. J. Beaulieu & Joe Mattey, 1998. "The Workweek of Capital and Capital Utilization in Manufacturing," Journal of Productivity Analysis, Springer, vol. 10(2), pages 199-223, October.
    17. Kennedy, James E., 1998. "An Analysis of Time-Series Estimates of Capacity Utilization," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 169-187, January.
    18. Ya Wang & Jiaofeng Pan & Ruimin Pei & Guoliang Yang & Bowen Yi, 2020. "A Framework for Assessing Green Capacity Utilization Considering CO 2 Emissions in China’s High-Tech Manufacturing Industry," Sustainability, MDPI, Open Access Journal, vol. 12(11), pages 1-25, May.
    19. Briec, Walter & Kerstens, Kristiaan & Prior, Diego & Van de Woestyne, Ignace, 2010. "Tangency capacity notions based upon the profit and cost functions: A non-parametric approach and a general comparison," Economic Modelling, Elsevier, vol. 27(5), pages 1156-1166, September.
    20. Ray, Subhash C., 2015. "Nonparametric measures of scale economies and capacity utilization: An application to U.S. manufacturing," European Journal of Operational Research, Elsevier, vol. 245(2), pages 602-611.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oeg:wpaper:2002/01. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Luis Orea) or (David Roibas). General contact details of provider: http://edirc.repec.org/data/geovies.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.