A STOCHASTIC FRONTIER ANALYSIS OF COST EFFICIENCY IN TURKISH CEMENT INDUSTRY

Abstract

Purpose - The main focus of this paper is to measure cost efficiency in Turkish Cement Industry using firm level data over the period 2008-2016. The measurement of cost efficiency in the industry in which there can seem usually competition infringement is of great importance regarding effective allocation of resources. The ineffective allocation of resources can bring about cost inefficiency. Methodology - In this study, efficiency is measured using a frontier analysis approach, which quantifies efficiency as the gap between the best achievable performance and actual performance. The Stochastic Frontier Analysis (SFA) method is employed to assess cost efficiency of each firm in this manner. By incorporating both statistical error and inefficiency, the SFA method recognizes that deviations from optimal performance can arise from both random errors and inefficiency factors. Findings- Empirical results show that cost efficiency scores vary between 82% and 93% by different models. The results also indicate a wide range of cost efficiencies across different size cement firms. The lowest cost efficiency score is estimated by TFE, BC95, and PL81 models in 2015. Conclusion- Average cost efficiency score varies between approximately 93% and 82%, which means that the firms can potentially achieve at least 7% and a maximum of 18% reduction in input costs.

Keywords

• Stochastic frontier analysis
• cement industry
• cost efficiency
• efficiency estimation
• time-varying
• invariant efficiency

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