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More on the Fox paradox. (English) Zbl 1253.91094

Summary: We show that the compatibility between efficiency measures and the aggregation procedure is not enough to resolve the Fox paradox when different inputs are employed in each activity. We explicitly illustrate this point by considering the additive aggregation of cost efficiency indicators for production and advertising activities, which use different inputs. Then, the overall cost efficiency indicator is given by the weighted (rather than the simple) sum of the production and the advertising cost efficiency indicators. The reason is that the value of the directional vector used to normalize the difference between the minimum and the observed cost in each activity-based efficiency indicator will differ.

MSC:

91B38 Production theory, theory of the firm
91B82 Statistical methods; economic indices and measures
Full Text: DOI

References:

[1] Fare, R.; Grosskopf, S., Outfoxing a paradox, Economics Letters, 69, 159-163 (2000) · Zbl 0961.91026
[2] Fare, R.; Grosskopf, S.; Seldon, B. J.; Tremblay, V. J., Advertising efficiency and the choice of media mix: a case of beer, International Journal of Industrial Organization, 22, 503-522 (2004)
[3] Fox, K. J., Efficiency at different levels of aggregation: public vs. private sector firms, Economics Letters, 65, 173-176 (1999) · Zbl 1037.91538
[4] Peyrache, A.; Coelli, T., Testing procedures for detection of linear dependencies in efficiency models, European Journal of Operational Research, 198, 647-654 (2009) · Zbl 1163.90841
[5] Seldon, B. J.; Jewell, R. T.; O’Brien, D. M., Media substitution and economies of scale in advertising, International Journal of Industrial Organization, 18, 1153-1180 (2000)
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