This paper proposes a two-dimensional efficiency decomposition (2DED) of profitability for a production system to account for the demand effect observed in productivity analysis. The first dimension identifies four components of efficiency: capacity design, demand generation, operations, and...

Demand fluctuations that cause variations in output levels will affect a firm’s technical inefficiency. To assess this demand effect, a demand-truncated production function is developed and an “effectiveness” measure is proposed. Often a firm can adjust some input resources influencing the...