Issue: 2025/Vol.35/No.2, Pages
DETERMINISTIC VS. STOCHASTIC METHODS FOR FRONTIER ESTIMATION: UPDATE AND ILLUSTRATION
William Weber
, Shawna Grosskopf, Kathy Hayes, Heike Wetzel
This is not yet the definitive version of the paper. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article.
Cite as: W. Weber, S. Grosskopf, K. Hayes, H. Wetzel. Deterministic vs. stochastic methods for frontier estimation: update and illustration. Operations Research and Decisions 2025: 35(2). DOI 10.37190/ord250205
Abstract
We estimate and compare a deterministic production frontier to a production frontier estimated using stochastic methods. This comparison is illustrated by estimation of the Lerner index of monopoly power for a public sector producer. The Lerner index estimates the percentage mark-up of price over marginal cost. For the deterministic method we use bootstrapping methods to construct confidence intervals for the Lerner index and its price and marginal cost components. Marginal cost estimates are derived from a translog cost function. Since market prices are usually not observed for public sector producers or are distorted because of subsidies, we use duality theory and derive price from observed costs and an estimated translog input distance function. Data from German public theaters' production of performances to attract spectators using artistic staff, administrative staff and operating expenditures are used as an example. We find no evidence of monopoly power.
Keywords: Lerner index, public sector managerial behavior, Aigner-Chu deterministic method, bootstrapping
Received: 5 July 2024 Accepted: 3 January 2025
Published online: 8 February 2025