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On Price Efficiency

Author

Listed:
  • Fare, Rolf
  • Grosskopf, Shawna
  • Nelson, Julianne

Abstract

In many instances, a firm's observed production choices will not be consistent with profit maximization or cost minimization at market prices. Such firms are generally assumed to minimize cost with respect to shadow prices. The authors extend this shadow cost function approach to allow for the identification of firm-specific shadow prices. Using a piecewise linear representation of the reference technology, they specify a linear program and interpret its solution as a set of shadow prices. The authors derive Farrell-like measures of dual allocative, technical, and overall efficiency. They close with an example illustrating the use of this technique. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Fare, Rolf & Grosskopf, Shawna & Nelson, Julianne, 1990. "On Price Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 709-720, August.
    • Handle: RePEc:ier:iecrev:v:31:y:1990:i:3:p:709-20
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    Citations

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    Cited by:

    1. Mika Kortelainen & Timo Kuosmanen, 2007. "Eco-efficiency analysis of consumer durables using absolute shadow prices," Journal of Productivity Analysis, Springer, vol. 28(1), pages 57-69, October.
    2. Cherchye, Laurens & Van Puyenbroeck, Tom, 2007. "Profit efficiency analysis under limited information with an application to German farm types," Omega, Elsevier, vol. 35(3), pages 335-349, June.
    3. Guido Cella & Giovanni Pica, 2001. "Inefficiency Spillovers in Five OECD Countries: An Interindustry Analysis," Economic Systems Research, Taylor & Francis Journals, vol. 13(4), pages 405-416.
    4. Kuosmanen, Timo, 2001. "DEA with efficiency classification preserving conditional convexity," European Journal of Operational Research, Elsevier, vol. 132(2), pages 326-342, July.
    5. Joseph Paradi & Fai Tam, 2012. "The examination of pseudo-allocative and pseudo-overall efficiencies in DEA using shadow prices," Journal of Productivity Analysis, Springer, vol. 37(2), pages 115-123, April.
    6. Cho, Bo-Hyun & Hooker, Neal H., 2004. "The Opportunity Cost Of Food Safety Regulation - An Output Directional Distance Function Approach," Working Papers 28316, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    7. Cho, Bo-Hyun & Hooker, Neal H., 2004. "Measuring The Impact Of Food Safety Regulation-An Output Directional Distance Function Approach," 2004 Annual meeting, August 1-4, Denver, CO 20016, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Tone, Kaoru & Tsutsui, Miki, 2007. "Decomposition of cost efficiency and its application to Japanese-US electric utility comparisons," Socio-Economic Planning Sciences, Elsevier, vol. 41(2), pages 91-106, June.
    9. Cherchye, Laurens & De Rock, Bram & Hennebel, Veerle, 2014. "The economic meaning of Data Envelopment Analysis: A ‘behavioral’ perspective," Socio-Economic Planning Sciences, Elsevier, vol. 48(1), pages 29-37.
    10. Lukáš Rečka & Milan Ščasný, 2015. "Shadow prices of air pollutants in Czech industries: A convex nonparametric least squares approach," EcoMod2015 8523, EcoMod.
    11. Grosskopf, S. & Margaritis, D. & Valdmanis, V., 1995. "Estimating output substitutability of hospital services: A distance function approach," European Journal of Operational Research, Elsevier, vol. 80(3), pages 575-587, February.
    12. Athanassopoulos, Antreas & Gounaris, Chrysostomos, 2001. "Assessing the technical and allocative efficiency of hospital operations in Greece and its resource allocation implications," European Journal of Operational Research, Elsevier, vol. 133(2), pages 416-431, January.
    13. Triantis, Konstantinos & Otis, Paul, 2004. "Dominance-based measurement of productive and environmental performance for manufacturing," European Journal of Operational Research, Elsevier, vol. 154(2), pages 447-464, April.
    14. Kuosmanen, Timo & Kortelainen, Mika & Sipiläinen, Timo & Cherchye, Laurens, 2010. "Firm and industry level profit efficiency analysis using absolute and uniform shadow prices," European Journal of Operational Research, Elsevier, vol. 202(2), pages 584-594, April.
    15. Jean-Paul Chavas & Zohra Mechemache, 2006. "Efficiency measurements and the gains from trade under transaction costs," Journal of Productivity Analysis, Springer, vol. 26(1), pages 67-85, August.

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