Productivity Assessment of Multiple Retail Outlets
Journal of Retailing, Vol. 72, No. 4, 1996
24 Pages Posted: 5 Mar 2014
Date Written: 1996
One of the main problems in assessing the relative efficiency of multiple retail outlets is the fact that customers are an essential component of the "production process" in retailing. Hence, the efficiency of a particular retail store depends both on the seller's and the buyers' efficiency. While there is often data on each store's inputs to the production of retail serv1ces, the contribution of each store's customers to this process is difficult to measure, and often goes unmeasured. In the absence of data on variation in customer efficiency across stores, it is difficult to make comparisons of the relative efficiency of the retailer's operation across stores. In this paper, we propose to solve the problem of missing data on customer inputs by treating stores as members of different latent classes, where the classes are defined by differences in customer inputs and other market characteristics. We consider the clusterwise estimation of multiple translog cost functions, which identifies sets of retail outlets operating under similar conditions and simultaneously estimates multiple cost functions for these classes. The efficiency of each outlet would then be evaluated relative to others in its class, which allows for a more equitable evaluation of each retail outlet, in comparison to other units operating under similar conditions.
We apply this approach in the evaluation of multiple branches from a commercial bank in Latin America, and compare the efficiency measures obtained from it with measures obtained from other methods, using the bank's central managers' classification of markets as a benchmark. Our results indicate that the clusterwise estimation of translog cost functions leads to a more equitable assessment of the branches, more in tune with the market differences perceived by the bank managers.
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