Capacity utilisation and profitability: A decomposition of short-run profit efficiency

Coelli, T, Grifell-Tatje, E and Perelman, S (2002) Capacity utilisation and profitability: A decomposition of short-run profit efficiency. International Journal of Production Economics, 79 2002: 261-278. doi:10.1016/S0925-5273(02)00236-0

Author Coelli, T
Grifell-Tatje, E
Perelman, S
Title Capacity utilisation and profitability: A decomposition of short-run profit efficiency
Journal name International Journal of Production Economics   Check publisher's open access policy
ISSN 0925-5273
Publication date 2002-01-01
Sub-type Article (original research)
DOI 10.1016/S0925-5273(02)00236-0
Open Access Status Not yet assessed
Volume 79
Issue 2002
Start page 261
End page 278
Total pages 18
Editor Grubberstroem
Place of publication Netherlands
Publisher Elsevier
Language eng
Subject C1
340402 Econometric and Statistical Methods
720205 Industry costs and structure
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. (C) 2002 Elsevier Science B.V. All rights reserved.
Keyword Engineering, Industrial
Engineering, Manufacturing
Operations Research & Management Science
Capacity Utilisation
Profit Decomposition
Technical Efficiency
Allocative Efficiency
Q-Index Code C1
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Excellence in Research Australia (ERA) - Collection
School of Economics Publications
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Citation counts: TR Web of Science Citation Count  Cited 45 times in Thomson Reuters Web of Science Article | Citations
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Created: Wed, 15 Aug 2007, 03:07:34 EST