Categorical variables in DEA.

If a DEA model has a mix of categorical and continuous variables a standard LP formulation can still be used by entering all combinations of categorical and continuous variables as different types of inputs and/or outputs. Most units will then not have positive levels of all variables. The implications for selection of peers are investigated. Peers can have the same or fewer types of inputs than the unit under investigation, but either fewer or more types of outputs. There is a basic asymmetry between number of positive inputs and outputs of the peer units due to more of inputs reducing efficiency while more of outputs improving efficiency. The special cases of imposing a hierarchical structure on the categorical variables dealt with in the literature can easily be incorporated.Categorical variable; DEA; efficiency; linear programming; peer

The Anatomy of Market Power in Electricity Markets with Hydropower as Dominating Technology

The problem of optimal management of a water reservoir by a hydropower producer is necessarily a dynamic one since water can be transferred between periods. A hydropower producer being a monopolist cannot reduce output in the classical way without spilling water. He will follow a strategy of setting marginal revenues equal between time periods and thus shift water from relatively inelastic periods to relatively elastic ones. If the monopolist has thermal capacity the strategy is the same, but the utilization of thermal capacity is reduced. If the monopolist has control over external trade import is reduced and export increased compared with the social solution. Technical constraints of limited reservoir and interconnector capacity and a competitive fringe may reduce markedly the consequences of exercising market power.Hydropower, thermal power, market power, flexibility-corrected price, competitive fringe.

The Compensation mechanism in the rains model: the Norwegian targets for acidification.

The RAINS model is used to calculate cost minimising abatement policies subject to European-wide spatial restrictions on pollution. The principle for choosing environmental targets for the 1994 Oslo Protocol was closing a gap between benchmark- and critical loads for each grid with a uniform percentage. During the negotiations for the 1999 Gothenburg Protocol accumulated ecosystems exceedances was adapted as basis for gap closure, and overshooting of the constraints allowed as an option, provided compensation could be found within the same country. A theoretical discussion of this compensation mechanism is provided. A simulation study, using the full RAINS model, of the impact of different levels of targets for troublesome Norwegian grids is presented, and results in the form of changes in accumulated acidity excesses and costs for the participating countries are reported.Acid rain; RAINS; critical loads; gap closure; accumulated exceedances; compensation mechanism

Selling Picasso paintings: the efficiency of auction houses.

Previous works applying hedonic price technique to determine the formation of auction prices of objects of art have found no conclusive result about the impact of auction houses on final prices. In these studies the object of art has been the unit, and influence of auction houses is analysed by testing whether auction house impact on price is significant or not within a framework of central tendencies. In order to focus on auction houses as a unit we have applied a benchmarking technique, DEA, developed for efficiency studies. Categorial and continuous variables are used as inputs and auction prices as outputs. Performance indicators are defined and calculated giving an insight into auction house differences impossible to obtain using hedonic price approach.painting; auction house; hedonic price; DEA; efficiency

The performance of auction houses selling Picasso Prints.

It has been observed that similar prints can obtain quite different prices at different auctions within the same auction period. Previous works applying hedonic price technique to determine the formation of auction prices of objects of art have found no conclusive result about the impact of auction houses on final prices. In these studies the object of art has been the unit, and influence of auction houses is analysed by testing whether auction house impact on price is significant or not within a framework of central tendencies. In order to focus on auction houses as a unit we have applied a benchmarking technique, DEA, developed for efficiency studies. Performance indexes are defined and calculated giving an insight into auction house differences difficult to obtain using hedonic price approach.Performance; auction house; Picasso prints; hedonic price; benchmarking; best practice; DEA

Properties of a Non-Competitive Electricity Market Dominated by Hydroelectric Power

An important conclusion from the literature on hydropower is that if there are no other constraints than the available water reservoirs for a year, and operating costs are ignored, the competitive (and socially optimal) outcome is characterized by the (present value) price being constant through the year. A second important conclusion is that the outcome under monopoly generally will differ from this, provided that the demand functions differ across different days (or other sub-periods) of the year. We show that even if the demand function is the same all days of the year, the monopoly outcome will generally differ from the competitive outcome. The difference is caused by the profit function of a price-setting producer of hydropower being non-concave. This non-concavity can be caused by short-run capacity limits either on exports and imports of electricity, or on the supply of alternative electricity sources.Electricity prices, Hydropower

The Tale of Two research Communities: The Diffusion of Research on Productive Efficiency

The field of theoretical and applied efficiency analysis is pursued both by economists and people from operational research and management science. Each group tends to cite a different paper as the seminal one. Recent availability of extensive electronically accessible databases of journal articles makes studies of the diffusion of papers through citations possible. Research strands inspired by the seminal paper within economics are identified and followed by citation analysis during the 20 year period before the operations research paper was published. The first decade of the operations research paper is studied in a similar way and emerging differences in diffusion patterns are pointed out. Main factors influencing citations apart from the quality of the research contribution are reputation of journal, reputation of author, number of close followers; colleagues, “cadres of protégés”, Ph.D. students, and extent of network (“invisible college”). Such factors are revealed by the citing papers. In spite of increasing cross contacts between economics and operations research the last decades co-citation analysis reveals a relative constant tendency to stick to “own camp” references.Farrell efficiency measures, data envelopment analysis, DEA, bibliometry

Calculating the scale elasticity in DEA models.

In economics scale properties of a production function is charcterised by the value of the scale elasticity. In the field of efficiency studies this is also a valid approach for the frontier production function. It has no good meaning to talk about scale properties of inefficient observations. In the DEA literature a qualitative characterisation is most common. The contribution of the paper is to apply the concept of scale elasticity from multi output production theory in economics to the piecewise linear frontier production function, and to develop formulas for calculating values of the scale elasticity for radial projections of inefficient observations. Illustrations also on real data are provided, showing the differences between scale elasticity values for the input- and output oriented projections and the range of values for efficient observations.Scale elasticity; DEA, production theory; Farrell efficiency measures

International benchmarking of electricity distribution utilities.

Benchmarking by means of applying the DEA model is appearing as an interesting alternative for regulators under the new regimes for electricity distributors. A sample of large electricity distribution utilities from Denmark, Finland, Norway, Sweden and the Netherlands for the year 1997 is studied by assuming a common production frontier for all countries. The peers supporting the benchmark frontier are from all countries. New indexes describing cross country connections between peers and their inefficient units are developed, as well as productivity measurements between units from different countries.Electricity utility; benchmarking; efficiency; DEA; Malmquist productivity index