Decomposition of cost efficiency with adjustable prices: an application of data envelopment analysis

The paper focuses on the possibilities for a cost efficiency (CE) decomposition using data envelopment analysis (DEA) models in situations when input prices are not identical among decision making units (DMUs). To date, several approaches dealing with the CE decomposition under conditions of non-competitive markets with adjustable input prices have been developed in the DEA literature. This paper summarizes four main DEA models for CE decomposition in situations where DMUs are not price takers and compares them with the newly developed approach for CE decomposition in which the individual efficiency components are consistent with their traditional definitions. Based on the decomposition of the actual total cost of DMUs on the minimum total cost and the potential cost savings due to input inefficiencies, the CE measure is disentangled into Pareto-Koopmans efficiency component, price efficiency component and allocative efficiency component. To highlight the main differences between the new and the existing CE models a simple illustrative example is given. The applicability of the measures developed is illustrated in the context of the analysis of bus transport undertaking performance.