Measuring consumption efficiency with utility theory and stochastic frontier analysis

Abstract

The concept of production efficiency has been studied since the 1960s, but consumption activity as well may be inefficient for various reasons, such as product complexity, lack of information, the bounded rationality of the consumer and imperfect markets, to name a few. This study proposes a conceptual framework for measuring the consumption efficiency of differentiated products, based on traditional utility theory. It employs stochastic frontier analysis (SFA) in an empirical analysis. It makes use of hedonic price theory to link traditional utility theory and the SFA framework. When the developed model is applied to the Korean personal computer market, empirical results indicate the levels and distribution of consumption efficiency in that market. The findings afford us a better understanding of the characteristics of the innovation process in that market.