Value efficiency and its decomposition into direct price and quantity effects

Based on the idea that in real markets firms have some freedom to set their output prices and negotiate input unit costs, this paper introduces a new approach for value efficiency decomposition as the product of direct price and quantity effects. Our framework relies on the axiomatization of a value transformation set on which quantity, price and value distance functions can be defined. The methodology developed allows for various degrees of dependency between quantity and price as well as for different degrees of freedom in price setting. The value efficiency decomposition can encompass all traditional measures such as cost, revenue, profit and profitability efficiencies. An application on French cattle farms illustrates the appeal of our approach for practitioners. Highlights • Calculation of a direct price effect based on a comparison of prices among similar firms • Value decomposition respects the product test • Possibility to consider various degrees of dependency between the quantity and the price • Generalization of traditional quantity and more recent price distance functions • Extensions of this methodology include cost, revenue, profit and profitability measures