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International Journal of Market Research Vol.

51 Issue 3

Exploring the price efficiency within automotive markets


An application of data envelopment analysis
Pingjun Jiang
La Salle University

Using a non-parametric data envelopment analysis (DEA) approach, this paper compares the price of each car model in a segment of the personal car market with the best possible price in view of the technology available given its particular combination of characteristics. In this approach, a car model is defined as price efficient if it offers customers the highest value per dollar spent for that set of characteristics. Likewise, a car model is inefficient if there is some other car model with a lower price having equivalent or higher quality, whereby a measure of the price efficiency is determined by the price reduction needed to make a car model efficient. The data set covers 141 different year 2002 car models, as appeared in Consumer Reports magazine. The vehicles that are listed by Edmunds.com as consumers most wanted are compared with those at the top of our efficiency list. It is found that the majority of cars at the top of our list are also listed as most wanted by Edmunds.com. Evidently, consumers who usually make decisions based on price and quality information will naturally employ a heuristic such as buy car models at the top of price efficiency list if this list is made available to them.

Introduction
There has been considerable change in the automotive industry. Product life cycles have shortened, internal competition has increased and competition has become a worldwide phenomenon. The product is becoming increasingly important and strategic in corporate marketing mixes in this new context; therefore, the product development process ensures that car models perceived of higher value will fulfil the needs of the highest possible number of customers more satisfactorily and rapidly.

Received (in revised form): 14 August 2007

2009 The Market Research Society DOI: 10.2501/S1470785309200621

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Car manufacturers are required to address increasingly specific market needs while still providing value, in order to ensure success and thereby maintain or improve their position with regard to competitors. Substantial price dispersion has been found or implied in a large number of studies in actual retail automotive markets (examples are Benham 1972; Pratt et al. 1979; Maynes & Assum 1982; Dahlby & West 1986; Shugan 1988). For the simple reason that consumers are assumed to maximise their utility, this is strong evidence that consumers are less than perfectly informed about the alternatives that are available in consumer markets (see, for example, Oxenfeldt 1950; Bettman 1979; Beals et al. 1981; Maynes & Assum 1982). The literature indicates several reasons why consumers may make choices without being fully informed. The consumer is faced with the non-availability of desired information (Feldman & Spencer 1965) and the cost of time needed to acquire information (Mitchell & Sorenson 1986; Ratchford & Gupta 1987). There are limitations of processing capacity (Bettman 1979; Beals et al. 1981) culminating in consumers insufficient capability to understand all available information (Sepstrup 1978). Especially in automotive markets, technical complexity and the multi-component nature of products (Maynes & Assum 1982) potentially affect price dispersion. That consumers make purchase decisions based on maximising their utility function with imperfect information raises some obvious questions. How are the car models positioned in the market in terms of providing consumers a set of utilities at a certain price? How does such position relate to its market performance (e.g. sales)? To address these questions, the utility derived from personal cars might be an interesting area in which to perform consumption efficiency analysis to examine which cars satisfy a consumers needs, given their respective costs. The critical point behind consumption efficiency is then how to identify and measure these needs. Before one can conclude that consumers do not reach their consumption frontier with the amount of money they spend, i.e. they are inefficient in their consumption bundle, the consumption frontier must be objectively defined. Obviously, summation over utilities for different consumers is not objectively measured as is summation over production from different plants. Studies in production, such as that by Womack et al. (1990), are typically directed to analysts and potential car owners as well, and indicate that consumers should purchase car models that are cheaper, have lower variable and service costs, have a longer life and higher performance than

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cars made by a different production technology. Many car owners, car magazines, journalists and experts (e.g. Consumer Reports, Annual Auto Issue, 2002, and J.D. Power Associates, www.jdpower.com) seem to agree with that. Various marketing investigations among car owners show that some car models perform better in many respects than the others. The tests from car magazines, though, are rather subjective and reflect the drivers personal evaluation of the tested car. In addition, cars are often tested against each other, without investigating whether both cars are inefficient. Furthermore, such tests do not quantify how efficient the recommended car model is or how inefficient the non-recommended one is. The purpose of this study is to examine if and to what extent some car models/makes are superior and, more importantly, whether such superiority are turned into larger sales. The results of this study are valuable not only to consumers but also to producers. For instance, are consumers most wanted cars also the most efficient car models? Alternatively, are the least efficient car models the consumers least wanted? This study intends to provide consumers with advice to avoid certain car models as being inefficient for one or more reasons, and by doing so increase consumer welfare. The study may further inform an automotive producer whether its competitors presumptive model is superior to its own and in that case what substantial improvements are required in order to turn its inefficient car into an efficient one. The method applied to evaluate this is the data envelopment analysis (DEA) approach, using economic and technical data for 141 different models in 2002, from Consumer Reports. This paper is organised as follows. A simple presentation of the DEA approach and its input-orientated formalisation is provided. Next, car models are evaluated and the main findings summarised. Finally, a general sales model with some additional criteria is provided and discussed, and the conclusions and managerial implications summarised.

Methodology A simple DEA approach


This study adopts Kamakura et al.s (1988) methodology paradigm in terms of defining and measuring market efficiency. Kamakura et al. employ a DEA for measuring the degree of inefficiency of each brand within a product category. They define the measure of price efficiency in the characteristics-space. According to them, this measurement allows comparison of the price of each brand with the best possible price under the

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technology available at its particular combination of characteristics. It also allows the identification of a set of efficient brands used as the standard of comparison. Finally, this measurement provides some instructions on how to make a brand price-efficient. Using Kamakura et al.s approach, a brand can be defined as efficient if it provides the highest value per dollar spent for that set of characteristics where an efficient brand would be assigned a value of 1 on a price-efficiency scale. Efficiency of any particular brand is measured as the ratio between the efficient price and the actual price paid. A potentially useful application of Kamakura et al.s study might involve providing lists of inefficient brands or providing price ranges in which inefficient brands would be efficient. Such information would potentially be useful to a consumer. We apply the methodology set forth in Kamakura et al.s study to a number of car models in automotive markets. Let us return to economics and work with measured costs and benefits. Consider a rational consumer who pays an amount of money, p, to purchase and drive a car, y. In fact, in purchasing a car, y, one buys a bundle of technical characteristics, t, such as space, weight, engine power, etc., which provide the owner with a utility Uy(p, t). We consider p as the economic or price variable. Obviously, the first partial derivative with respect to p is negative (the more expensive a car, the less utility it yields) and with respect to t is positive (the higher the technical performance, the higher the utility). For a given utility level derived from a car, y, we obtain that dt/dp = yp/yt, i.e. the rate at which the car buyer is willing to substitute technical performance for costs equals the ratio of derivatives of the utility function. It is assumed that dt/dp > 0, i.e. indifference curves between costs and technical performance have a positive slope, if the lower utility from higher costs is compensated by the higher utility from higher performance. Fare and Grosskopf (1994), among others, have formalised inputorientated DEA models. A detailed description of a DEA model can be found in Banker and Morey (1986). They extended the original model to empirical data involving ordinal or nominal characteristics. This extension was incorporated into Kamakura et al.s study, as well as ours. We will not present the detailed procedures on how the DEA model is applied. This study determines the efficiency by mathematically solving the following problem (adapted from Banker et al. 1984).
m g (Max)Zk + sr+ + si  r =1 hj , sr , si i =1

(1)

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subject to: prk zk prj hj + sr+ = 0


j =1 n

(r = 1, 2, , g) (i = 1, 2, , m)

(2) (3) (4)

x h
ij j =1 n j =1

+ si = xik

= 1
hj , sr+ , si 0 (j = 1, 2, , n)

(5)

where n is the number of car models for each category, m the number of inputs, g the number of outputs, xij the level of i-type input for car model j, prj the level of r-type output (car characteristic) for car model j, Zk is the efficiency ratio for the car model under consideration, is a very small constant, sr+ and si are slack variables for output r and input i, and hj is the weight for car model j. The slacks measure, in addition to the price reduction, how many more of the attributes should be offered by the inefficient car models to make them efficient (Kamakura et al. 1988). According to these models, the objective is to reduce the eventual slack in inputs (costs) without reducing the optimal output (technical performance). If, for instance, the input slack is equal to unity, the observed car is efficient. If, on the other hand, the input slack is less than unity, the car under investigation is inefficient. A computer program is utilised to solve the above DEA models for each of the nine car categories. Given these quality indexes, we employ the same definition of efficiency as employed by Hjorth-Anderson (1984) and Kamakura et al. (1988). Hence, a car model is inefficient if there is some other car model with a lower price having equivalent or higher quality, and the price reduction needed to render the chosen car model efficient provides a measure of the loss incurred by choosing an inefficient car model.

Determinant attributes
Cars are extremely differentiated products. If producers intend to satisfy the consumers preferences, they have to offer many possibilities of choice. The entire spectrum of factors or characteristics can be very large, covering space, motor power, safety, price, reliability, dimensions, and so on.

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Obviously, in order to evaluate the efficiency of a particular car, all these characteristics should be taken into account. The problem that a car buyer faces, however, is that some of these factors (such as driving features, design, safety, reliance) are not objectively measured. A car buyer must rely either on car manufacturers who claim that their models are superior to those of their competitors, on professional car magazines, or on the objective and measurable characteristics. All determinant attributes need to be included in the DEA study because the efficiency calculation depends on the assumption that utility is estimated correctly. A buyer may not have sufficiently good information on some of these attributes that are in the DEA calculation to make comparisons of the attractiveness of the bought model with its competitors models. In addition, a list of attributes, which could be assigned to each competing model, is developed independently of the buyers knowledge. These attributes need to capture salient dimensions as well as possible. Gupta and Ratchford (1992) uncovered five dimensions from a set of concrete attributes that determine a consumers choice of selecting car models. Starting from their perceptual constructs, we compile a corresponding list of attributes that are available for each car model in our data set. In particular, an exhaustive list of ratings of each of the 141 cars in the study on attributes available in Consumer Reports was assembled. Eliminating all attributes in the Consumer Reports data that were not significantly related to at least one perceptual dimension developed by Gupta and Ratchford (1992), and eliminating redundant attributes, led to a list of ten attributes for which objective data were readily available, and which were significantly related to one or more of the perceptual constructs. A problem is that these ten attributes may not adequately capture differences in quality, performance and style, which were identified as important attributes by Gupta and Ratchford (1992). Unfortunately there is no clean objective analogue of these attributes. However, since they may be an important influence on consumer choice, a reasonable measure of these attributes for each of the 141 car models identified in this study was required. Our solution was to establish attribute ratings utilising studies published by J.D. Power and Associates. The automobile consumer satisfaction ratings given by J.D. Power and Associates are based on surveys of actual automobile owners, and cover issues such as owner-reported problems with the vehicle and measures of a consumers satisfaction with particular characteristics of the vehicle.

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In general, the attributes used as the basis for our analysis do a reasonable job of capturing variation in the perceptual attributes that consumers appear most likely to use in differentiating among car models. The attributes considered in this study were those listed by Consumer Reports and J.D. Powers website (as shown in Table 1). The first ten attributes are objective measures. The rest of the attributes are subjective ratings on a 5-point scale. These 16 attributes (ten objective attributes plus ratings of six variables including comfort and styling) were used to capture most of the variation in the major perceptual constructs identified by Gupta and Ratchford (1992), and we have some confidence in assuming that they are capturing the major dimensions used by consumers in buying automobiles. The choice of these variables was not made arbitrarily. In fact, none of the relevant technical performance characteristics published in the magazine was left out. In addition, this study includes a measure of safety, given that data on airbags are available. This study is based not only on many measurable characteristics always used in car tests but also the selected parameters covering a large part of all possible subjective parameters that consumers consider when they decide to purchase a new car. Many car owners (and potential buyers as well) are driven by such soft or non-measurable parameters. Therefore, the selected performance parameters are rather comprehensive in this study. The price characteristic is the only characteristic that is treated as an economic parameter (input
Table 1 Automobile characteristics
Source Characteristics

Consumer Reports 1. Horse power 2. Seating (number of seats) 3. Length (inches) 4. Width (inches) 5. Weight 6. Drive wheel 7. Safety belt 8. Airbags (head); airbags (side) 9. ABS 10. Traction aid J.D. Power and Associates 11. Mechanical quality 12. Body and interior quality 13. Reliability 14. Feature and accessory quality 15. Performance (including acceleration and handling stability) 16. Style

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variable) and therefore minimised instead of maximised. However, as was mentioned at the beginning of the paper, these characteristics cover by no means all the possible parameters a car owner had in mind before making a purchase decision.

The data set


We now apply the methodology to this complex automotive product class, which involves a large number of continuous and ordinal attributes, and a large number of makes and models. A total of 141 different car models in 2002 were selected from Consumer Reports magazine, April 2003. The models are classified into nine groups by car type: family cars, small cars, large cars, luxury cars, upscale cars, minivan, sporty cars, SUVs and trucks. Technical performance criteria and detailed economic data (such as price and engine power) exist for these car models. In the sample, there are 73 car models made in the US, 3 made in Korea, 45 made in Japan and 20 made in Europe. Although it was intended to balance the number of car models among all the countries, the data availability mentioned above led to over-representation of American cars.

Analyses (two-step decision making)


From a productmarket point of view, a marketplace in the eye of the consumer represents the realistic market structure. Consumers with different decision-making processes have different perceptions of current market structure, and these perceptual differences will cause them to position car models in their consideration set in a different way. Some consumers put all the available car models into their consideration sets when shopping for a car; in this sense they implement a one-step decision-making process. However, many consumers perform two separate steps in buying a car: first, they decide which type of car they want to buy; then they form their consideration set by including only the car models within the car type of their choice. For instance, a consumer may decide to buy a luxury car and then look up the car models in the class that s/he has chosen. Since the majority of consumers adopt a two-step analysis, an efficiency map of the automotive market developed from such a basis is more realistic. Therefore, we will calculate the efficiency scores only with respect to two-step decision making and study the results. The efficiency scores will be termed as two-step decision making. The firm that does not understand the impact of the consumer decision-making process on

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its brand/model positioning/repositioning is likely to miss opportunities to capture new competitive advantages because of market structure changes brought about by competitors. In order to calculate efficiency under the two-step decision-making process, the relevant choice set had to be defined. Since consumers should be able to readily classify cars into general types simply by looking at them, it was felt reasonable to assume that consumers make an optimal choice of type of car (e.g. family vs luxury), and that the relevant alternatives for calculation of efficiency are other car models within the chosen type. That is, we assume that a consumer can readily tell the difference between general types of cars, but cannot tell which model within a type is best without more extensive search. Accordingly, the models that we employ in our efficiency calculations are other models in the general class in which the consumer made his or her choice. We employed the classification scheme used by Consumer Reports the magazine that publishes car model ratings in classifying each of the 141 models into one of nine classes. As mentioned above, these are family cars, small cars, large cars, luxury cars, upscale cars, minivan, sporty cars, SUVs and trucks. For car models that were estimated to be lower in quality but higher in price than at least one other alternative, efficiencies were calculated as in equations (1)(5) of the DEA model presented above. The results, which were calculated for quality scales constructed according to the two-step decision-making process outlined above, are presented for each car model/ make in Tables 25.

Efficiency estimates Results


As discussed earlier, the measures of efficiency under the two-step decisionmaking process were obtained. A summary of the DEA results is presented in Tables 25. The tables show the economic and technical performance inefficiency. All nine groups by car type have been tested separately for constant returns to performance (CRP), i.e. the lower performance level is derived from the cheaper cars, while the higher performance is derived from the expensive cars. Table 2 consists of all efficient car models and their corresponding prices. Table 3 displays the inefficient models classified according to the highest price efficiency obtained by the CRP frontier. A summary of efficiency estimates by car group and by country is presented

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Table 2 Efficient models classified by price (in US$)


Group I: Family cars Chevrolet Impala Chevrolet Malibu Dodge Stratus Ford Taurus Honda Accord Hyundai Sonata Mercury Sable Oldsmobile Alero Pontiac Grand Am Saturn L-Series Legacy/Outback Toyota Camry Volkswagen Passat Group II: Luxury Acura RL Audi A6/Allroad BMW 5-Series Cadillac DeVille Lexus GS300/GS430 Lincoln Continental Lincoln Town Car Mercedes-Benz E-Class Group III: Sporty cars Audi TT Chevrolet Camaro Ford Escape Ford Mustang Mazda MX-5 Miata Mercury Cougar Pontiac Firebird Toyota Celica Group IV: SUVs BMW X5 Chevrolet Blazer Chevrolet Tracker Dodge Durango Ford Excursion Hyundai Sante Fe Isuzu Rodeo/Sport Jeep Grand Cherokee Jeep Wrangler Mazda Tribute Mercedes-Benz M-Class Mitsubishi Montero Sport Nissan Xterra Pontiac Aztek Subaru Forester Suzuki Vitara/XL-7 Toyota 4Runner Price 19,960 17,535 17,400 18,815 15,500 15,499 19,820 17,640 16,800 16,370 19,295 18,970 21,750 43,150 35,400 35,950 42,590 38,605 38,185 40,170 48,450 31,200 18,285 18,415 17,365 21,180 16,520 19,920 17,085 38,900 19,475 15,865 25,100 35,110 17,199 16,100 25,425 15,230 18,155 36,300 22,777 17,999 19,995 20,295 15,599 26,335 Group IV: SUVs (continued) Toyota Highlander Toyota RAV4 Group V: Trucks Chevrolet S-10 Chevrolet Silverado 1500 Ford Ranger GMC Sierra 1500 Mazda B-Series Nissan Frontier Toyota Tacoma Toyota Tundra Group VI: Minivans Chevrolet Astro Chevrolet Venture Chrysler Voyager Dodge Caravan/Grand Ford Windstar GMC Safari Honda Odyssey Mazda MPV Mercury Villager Toyota Sienna Group VII: Small cars Chrysler PT Cruiser Dodge Neon Ford Focus Hyundai Elantra Nissan Sentra Saturn S-Series Subaru Impreza Toyota Echo Volkswagen Golf Volkswagen Jetta Volkswagen New Beetle Group VIII: Upscale cars BMW 3-Series Chrysler 300M Infiniti I35 Lexus ES300 Lexus IS300 Mazda Millenia Mercedes-Benz C-Class Group XI: Large cars Buick LeSabre Chrysler Concorde Ford Crown Victoria Pontiac Bonneville Toyota Avalon Price 23,880 16,525 13,742 17,518 12,330 17,408 12,840 12,799 11,900 15,605 23,920 21,380 16,355 16,355 22,340 23,920 24,250 22,250 19,340 23,905 16,275 12,315 12,470 12,499 11,799 10,570 17,495 9,995 15,050 16,850 15,900 27,100 28,415 28,750 31,505 29,435 28,075 24,950 24,495 22,510 22,930 25,700 25,845

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Table 3 Inefficient cars classified according to price efficiency estimated by CRP* frontier
Group I: Family cars Mazda 626 Infiniti G20 Dodge Intrepid Nissan Maxima Oldsmobile Intrigue Mitsubishi Galant Volvo S40/V40 Pontiac Grand Prix Buick Regal Buick Century Chrysler Sebring Group II: Luxury Mercedes-Benz S-Class Lexus LS430 Cadillac Seville Jaguar S-Type Group III: Sporty cars Porsche Boxster Mercedes-Benz SLK Chevrolet Corvette BMW Z3 Honda S2000 Group IV: SUVs Toyota Land Cruiser Acura MDX Infiniti QX4 Isuzu Trooper Lexus RX300 GMC Yukon Toyota Sequoia Nissan Pathfinder CRP 0.8273 0.8505 0.8616 0.8855 0.9116 0.9164 0.9197 0.9201 0.9467 0.9494 0.9522 Group IV: SUVs (continued) Chevrolet Suburban Chevrolet Tahoe Group V: Trucks Ford Explorer Sport Trac GMC Sonoma Ford F-150 Dodge Dakota Group VI: Minivans Oldsmobile Silhouette Pontiac Montana Chrysler Town & Country Nissan Quest Group VII: Small cars Mercedes-Benz CLK Toyota Prius Pontiac Sunfire Honda Civic Mazda Protg Chevrolet Monte Carlo Chevrolet Cavalier Group VIII: Upscale cars Volvo S80 Saab 9-5 Lincoln LS Oldsmobile Aurora Saab 9-3 Group XI: Large cars Buick Park Ave Mercury Grand Marquis CRP 0.9139 0.9907

0.8966 0.9911 0.9944 0.9995

0.6716 0.9788 0.9801 0.9917

0.8160 0.9009 0.9500 0.9795

0.5784 0.5829 0.7087 0.7244 0.7272

0.4991 0.8253 0.9050 0.9147 0.9549 0.9894 0.9955

0.5363 0.7069 0.7306 0.7739 0.7840 0.8949 0.9796 0.9865

0.7912 0.8546 0.8729 0.9509 0.9531

0.7510 0.9626

* CRP: constant return to performance, the producers are able to linearly scale the inputs and outputs without increasing or decreasing efficiency.

in Table 4. All car makes are classified (again based on average efficiency) and presented in Table 5. The results in Table 4 indicate that, under the two-step decision-making process, in terms of car type, the truck sub-market has average efficiency of 0.9901, with 66.7% of the tested trucks being efficient. The minivan sub-market follows, having a slightly lower efficiency at 0.9747, with

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Table 4 Summary of efficiency estimates


Subgroup Family car Luxury car Sports/sporty SUV Truck Minivan Small car Upscale Large car European Japanese Korean US Total Efficient cars/total cars tested 13/24 = 0.5417 8/12 = 0.6667 11/18 = 0.6111 16/24 = 0.6667 8/12 = 0.6667 10/14 = 0.7143 11/18 = 0.6111 7/12 = 0.5833 5/7 = 0.7143 12/20 = 0.60 28/45 = 0.6222 3/3 = 1.0 46/73 = 0.6301 89/141 = 0.6312 Average efficiency degree of all cars 0.9559 0.9685 0.9015 0.9330 0.9901 0.9747 0.9491 0.9519 0.9591 0.8879 0.9413 1.0000 0.9700 0.9499 (std dev. = 0.1020)

Table 5 Summary of all manufacturers based on CRP frontier efficiency estimates


Manufacturer Acura Audi BMW Buick Cadillac Chevrolet Chrysler Dodge Ford GMC Honda Hyundai Infiniti Isuzu Jaguar Jeep Lexus Lincoln Mazda Mercedes-Benz Mercury Mitsubishi Nissan Oldsmobile Pontiac Porsche Saab Saturn Subaru Suzuki Vitara/XL-7 Toyota Volkswagen Volvo Tested cars 2 2 4 4 2 14 6 6 10 4 4 3 3 2 1 2 5 3 7 6 4 2 6 4 7 1 2 2 1 1 13 4 2 Efficient cars (CRP) 1 2 3 1 1 9 4 4 8 2 2 3 1 1 0 2 3 2 5 3 3 1 3 1 4 0 0 2 1 1 10 4 0 Average efficiency for CRP 0.8535 1.0000 0.9311 0.9118 0.9900 0.9713 0.9837 0.9769 0.9891 0.9715 0.9105 1.0000 0.8604 0.8870 0.9917 1.0000 0.9526 0.9576 0.9689 0.7923 0.9907 0.7297 0.9753 0.9196 0.9609 0.5784 0.9039 1.0000 1.0000 1.0000 0.9493 1.0000 0.8555

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71.43% of its tested cars efficient. The large and upscale sub-markets performed similarly, with efficiencies of 0.9591 and 0.9519 respectively; and, respectively, 71.43% and 58.33% of the tested cars in these two categories are efficient. While estimated mean efficiency is lowest for sports cars (0.9015), this is also the type most likely to have attributes not well captured in our data (e.g. sportiness); consequently, the estimates in this category should be treated with some caution. Efficiencies will tend to be lower for categories having a larger number of alternatives because the cost of acquiring and retaining the information on these will be greater: after a point, it will be more cost-effective to risk losses rather than to seek more information. We measure the number of alternatives as the number of models in the class in which the consumers choice occurred (car models in a category). The correlation between these two is 0.466, a negative correlation, significant at alpha = 0.05. By our definition, inefficiency is the price reduction that a consumer could get from choosing some lower-priced model of equal utility. Since the expected price differential between the chosen model and the better alternative increases with the dispersion of prices in that category, inefficiency should increase (or efficiency should decrease) with the dispersion of prices in the category. We measure price dispersion as the standard deviation of prices in the class in which the consumers choice occurred (std dev. of prices). The correlation between these two is 0.518, a significant negative relationship at alpha = 0.05. If one is interested in the most frequent efficient cars with which the method chose to compare the inefficient cars, the models shown in Table6 dominate in respective car groups. However, it is not clear if these cars appear frequently because they are super-efficient, or if they are chosen to project the inefficient cars because they happen to lie near the majority of inefficient cars. For instance, a Mercedes-Benz C-Class customer will be satisfied with the distinct characteristics of his/her efficient car, without bothering if this model is regarded as an alternative model to, say, the inefficient BMW 5-series. Finally, there are six car makes that share first place as far as the total number of efficient models among the tested is concerned: the German Audi, with two out of two models; the American Jeep with two out of two; the Korean Hyundai with three out of three; the American Saturn with two out of two; Subaru with three out of three; and Volkswagen with four out of four. The results in Table 4 also indicate the average performance in terms of efficiency among the four countries. As expected, under the two-step

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Table 6 Dominating cars by car type


Car type Dominating cars in group

Family cars  Chevrolet Impala, Chevrolet Malibu, Ford Taurus, Honda Accord, Hyundai Sonata, Saturn L-Series and Volkswagen Passat Luxury cars  Audi A6/Allroad, BMW 5-Series, Cadillac DeVille, Lexus GS300/GS430 and Lincoln Continental Sporty cars  Chevrolet Camaro, Ford Mustang and Toyota Celica; SUV Hyundai Sante Fe, Pontiac Aztek and Suzuki Vitara/XL-7 SUVs Trucks Minivans Hyundai Sante Fe, Pontiac Aztek and Suzuki Vitara/XL-7 Nissan Frontier and Toyota Tundra Chevrolet Venture, Chrysler Voyager, Dodge Caravan/Grand and Mazda MPV

Small cars  Saturn S-Series, Toyota Echo, and Volkswagen Jetta Upscale cars Large cars Infiniti I35 and Mercedes-Benz C-Class Buick LeSabre, Chrysler Concorde and Ford Crown Victoria

decision-making process, the lowest efficiency in terms of CRP is obtained for the European cars (0.8879, with 60% of its tested car models efficient), and the highest for the Korean cars (1.000, with 100.0% of its tested car models efficient). On the other hand, there are significant differences between the European (as above) and US efficiency scores (0.9700, with 63.01% of tested car models efficient). The Japanese efficiency (0.9413, with 62.22% of its tested car models efficient) is higher for the CRP than the efficiency of the European cars. The US car efficiency is higher than that of the Japanese cars. In Table 4, the mean efficiency of all year 2002 car models in the automotive market under the two-step decision-making process is 0.9499, with 63.12% of the tested car models being efficient. In particular, as shown in Table 5, mean efficiency by car make ranges from 0.5784 for Porsche (i.e. an average price reduction of 42.16% is needed to render this make efficient) to 1.0 (Audi, Hyundai, Jeep, Saturn, Subaru, Suzuki and Volkswagen). Mean efficiency lies between 0.90 and 1.0 in 26 car makes, 0.85 to 0.90 in four makes, 0.70 to 0.85 in two car makes, and less than 0.70 in one car make. The most efficient car makes are Audi, Jeep, Saab, Subaru, Saturn, Nissan, Hyundai, Ford, Volkswagen, Mercury and Dodge. The least efficient car makes are Porsche, Mitsubishi, Volvo, MercedesBenz, Isuzu, Infiniti and Acura.

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Sensitivity analyses to subjective and objective measures


Since DEA is used to evaluate performance by considering input and output data, the results will depend directly on the input/output choices. In this section, we present the estimates of car models obtained with respect to different combinations of inputs and outputs. In particular, we examine the sensitivity of the car models efficiency scores on changes in the list of objective vs subjective outputs. With respect to the nine car types, all of their average efficiency scores and the number of inefficient car models are found sensitive to both subjective and objective measures (except the group of large cars). Overall, the greatest influence on a cars efficiency was the dimensionrelated (length, width and weight) output measure. Over 80% of the inefficient car models have to make improvement on these outputs. The drive wheel output measure had the second largest influence, with the non-availability of four-wheel drive (4WD) contributing to 82% of the inefficient car models. Another influential factor was the head airbag test. We also examined the sensitivity of the cars efficiency in each category on changes in the list of other outputs. The outputs Drive wheel, Length, Width and Seating had the largest influence on the efficiency scores of family cars. The outputs Drive wheel, Length, Width, Weight, ABS, Traction aid and Seating had a large influence on the efficiency scores of luxury/upscale cars. Furthermore, luxury car/upscale car models can best be differentiated among competition models through satisfying consumers perceived notions of style and comfort. The outputs Length, Weight, Traction aid and Seating had the largest influence on the efficiency scores of minivans. The outputs Length, Width, Weight and Head airbag had the largest influence on the efficiency scores of sporty/SUVs. The outputs Drive wheel, Side airbag, Head airbag and Traction aid had the largest influence on the efficiency scores of trucks. The results indicate that trucks, minivans and small cars can stand out by doing especially well on these objective features.

Brand name effect


Undoubtedly, affective elements such as brand image play an important role in car purchase, too. Consequently, cars with strongly preferred brand names are perceived of high value even when they are too expensive given their performance or specifications. The brand strength is correlated with the brand make efficiency to test this reasoning. According to the

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brand equity evaluation model employed by the Allgemeiner Deutscher Automobil Club (ADAC) (2001), brand strength is measured as an index of brand awareness, recognition, image and sympathy. The brand image data were taken from the 2003 driver survey conducted by the ADAC. The number of problems detected by cars in 2002 is also used to correlate with the brand efficiency scores. The first correlation is significant at alpha = 0.10 and, as expected, the coefficient is negative (sig. = 0.099; coefficient = 0.46). The second correlation is significant, too, but the coefficient is positive (sig. = 0.07; coefficient = 0.35). The results show that the efficient brands are those with lower brand images and tend to be those with more car maintenance problems detected later. Put another way, the consumers experience fewer maintenance problems with using those inefficient cars.

A general sales model


Additional selection criteria Efficient estimates in DEA models do not differentiate among efficient units. How can one rank all these efficient car models? A simple selection strategy is to allow potential buyers to purchase among these efficient cars according to the additional determining factors in their purchase process. We might therefore conclude that, since efficiency is not calculated relating to satisfaction or to depreciation and fuel economy (measured by mileage per gallon, MPG), one should choose among the efficient car models from Table 2, which perform highly in satisfaction scores, depreciation and MPG, too, such as the BMW 3-series, Honda Odyssey, Volkswagen Passat, Nissan Sentra and the BMW 5-series, if depreciation and MPG are important factors, too. Another general problem with the previous studies is that they are unable to provide information on whether the inefficient brands, however defined, have large or small purchase frequencies. Thus, we are unable to determine whether measured inefficiencies are due to temporary disequilibria that affect relatively few consumers, or whether purchases of inefficient brands are common, and consequent consumer losses are high. The issue is whether it is possible to develop a model that will explain sales by including efficiency score as a major influence factor. While there is a large body of literature that attempts to explain sales and market share (see Beatty & Smith 1987 for a review), there is very little work

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on determinants of sales, or on gains from the effort to affect efficiency. Both Punj and Staelin (1983) and Ratchford and Srinivasan (1989) have studied the determinants of cost savings (discounts) on cars, and Carlson and Gieseke (1983) have studied the determinants of savings on groceries, but we do not know of any recent field studies of the determinants of sales related to efficiency. It would be interesting to investigate if and to what extent new car owners behave according to the efficiency estimates of this study. If these estimates were known to everybody and no other characteristics were taken into account before the cars were purchased, our normative approach would imply that the inefficient models should be avoided. This can be tested using the sales statistics of year 2002. It is expected that efficient car models have larger than average sales, as suggested by economies of scale or economies of scope. Besides the efficiency consideration, a typical ultimate consumer asks two questions in purchasing an automobile: 1. What is its potential trade-in value? 2. Will I get reasonable MPG? On the other hand, customer satisfaction in general could have an effect on sales. Regressions with these factors as predicting variables are suggested in exploring this relationship between sales and efficiency scores.

The model
Following the above discussion, we postulate that increasing sales depend on a production process incorporating the efficiency of the car model, its depreciation rating, MPG and customer satisfaction about the car model. In order to simultaneously test our hypotheses about the impact of factors, efficiency, MPG, depreciation and satisfaction on sales volume, we build a multiple regression model using sales as the dependent variable. Independent variables are defined below. The parameters are estimated including all the car models within each car category that have sales figures available: DV: sales volume (by units) IVs: efficiency score (calculated through DEA, ranging from 01.0); satisfaction ratings on a 5-point scale; MPG; and depreciation (ratings on a 5-point scale).

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Specifically, we can represent the determinants of sales by the following relation: S = f (E, D, M, Sat, e) (6)

where S denotes sales, E is the efficiency of the car model, D is the depreciation, M is gas efficiency measured by MPG, Sat is the satisfaction with the car model, e is a random error term, and f is function. Equation(6) describes a function relating to sales. Higher performance on any of these predictors should lead to higher sales.

Estimation and results


Regression analyses are conducted, respectively, to test the impact of efficiency on sales for each car category. The sales model is significant only at the alpha = 0.10 level for the luxury car category (R2 = 0.902, F = 6.866, sig. = 0.073) and SUV category (R2 = 0.350, F = 2.426, sig. = 0.086). The coefficient estimates for the two car categories are shown in Table 7. In the luxury car category, at the alpha level 0.10, we can conclude that there is a highly significant impact on sales depending on the efficiency (beta = 1.685, sig. = 0.026). The positive signs of significant beta coefficients of efficiency, satisfaction, and MPG tell us that as these three variables increase, sales gains increase. But luxury cars with better depreciation didnt garner higher sales. In the SUV category, at the alpha
Table 7 Estimates for the general sales model by car type
DV (sales units by car type) Family cars, small cars, large cars, minivans, trucks, sporty cars, upscale Sales model (sig.) Non-significant Coefficients (beta) Sig.

Luxury cars 0.073 Constant Efficiency 1.685 Depreciation 1.588 Miles per gallon 1.252 Customer satisfaction 1.125 SUVs 0.086 Constant Efficiency 0.582 Depreciation 0.079 Miles per gallon 0.227 Customer satisfaction 0.369

0.042 0.026 0.020 0.067 0.029

0.188 0.009 0.737 0.265 0.152

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level 0.10, we can conclude that there is a highly significant impact on sales depending on the efficiency (beta = 0.582, sig. = 0.009). The positive sign of the significant beta coefficient of efficiency tells that, as efficiency increases, sales gains increase. Cars with higher customer satisfaction, better MPG and depreciation did not garner higher sales in the SUV car category, probably owing to the popularity of SUVs and minivans, which are typically gas-inefficient cars. Evidently, the high-efficiency car models are the best buy for many consumers purchasing luxury cars and SUVs. While one might assume MPG to be positively related to sales, the correlation between these two across SUV car models was not significant. It appears that consumers who face brands that provide an unfavourable position on MPG are generally able to compensate for this with other attributes. The luxury cars that sold well are those with high efficiency, good MPG and better customer satisfaction. Those best-selling luxury cars also tend to be the ones that depreciate fast. The SUVs that sold well are those that are efficient. The trucks that sold well are those that are less efficient but have good depreciation value. The family cars that sold well are those that are efficient, but the small cars that sold well are those that are less efficient and depreciate fast.

Discussion, conclusions and managerial implications Consumers perspective


We have estimated that, on average, buyers of automobiles could save about 24% of the car purchase price if they bought car models of at least equivalent utility at a lower price. Consumers appear to consider only a fraction of the models available to them in a given class, and in this sense they do not perform a complete search. In car classes with a large number of alternatives, or classes with a large price range, car buyers are likely to purchase inefficient cars due to their reluctance to thoroughly search the class. The results herein with respect to the family cars category illustrate this effect. This finding may reflect a lack of incentive to seek information on many alternatives due to costs of search, and it may also reflect the phenomenon of information overload, which has been studied in other contexts (Keller & Staelin 1987). If consumers are directly provided an efficiency list of car models, time saved in searching and comparison is considerable. Further, the accuracy and effectiveness of decision making will be very much improved.

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European cars performed best in depreciation, followed by Japanese cars. American cars showed greater depreciation than European and Japanese cars, but Korean cars showed the highest level of depreciation. European cars have the highest MPG, while American cars fare worst in the MPG category. Japanese and Korean cars perform comparably well in the MPG category. Overall, European cars are priced much higher than the cars of the other three countries. By car type, family cars have the highest MPG, and trucks perform the worst on this criterion, although trucks are the most efficient buy compared to other cars, followed by family cars. Sporty cars and SUVs do the best in terms of depreciation, followed by trucks and luxury/upscale cars. Potential car buyers always wonder if the car under consideration is worth purchasing, as compared with other competitive cars. This study was an alternative approach to help potential buyers find the best car among a variety of models.

Producers perspective
Recent visitors to Edmunds.com cast more than 80,000 votes for the 2002 Consumers Most Wanted vehicle awards. Which economy sedan stands out from the crowd? Which luxury SUV towers over the rest? How do consumers choices compare with those on our efficient car list? Are the efficient cars the Consumers Most Wanted? Are the consumers least wanted also the inefficient cars? Figure 1 provides a profile of the efficiency and the degree of being wanted by consumers for car models in the nine categories. Clearly, the precise boundary positions between quadrants are subjective. What is apparent, however, is that no matter where the boundaries are drawn, some car models that score well on efficiency are not greatly desired by consumers. This is despite the more general trend, also apparent, that higher overall efficiencies are associated with a higher degree of being wanted. Clearly, judging long-term viability on the basis of overall efficiency alone would overlook some car models good at attracting customers. In Figure 1, car models located in the upper-right quadrant should be viable so long as they at least maintain (in the long term) that position. Any scope for improved overall efficiency will reinforce the viability of these car models. The long-run viability of car models located in the bottom-right quadrant depends on any prospects for improved marketing communication/promotion strategies. There is probably a lot of scope for generating further growth of buyers interest. The low degree of

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Most Small cars: Honda Civic; Mercedes-Benz CLK Family cars: Nissan Maxima Luxury cars: Lexus LS 430; Acura 3.5RL Upscale cars: None Large cars: None Sporty cars: Honda S2000; Porsches Boxster; Chevrolet Corvette SUV: Nissan Pathfinder; Toyota Sequoia; GMC Yukon; BMW X5; Acura MDX Trucks: Ford Explorer; Dodge Dakota; Ford F-Series Minivan: None Consumers wanted Small cars: Hyunda Elantra; Nissan Sentra; Ford Focus; Subaru Impreza; Volkswagen Jetta; Volkswagen Golf Family cars: Honda Accord; Volkswagen Passat; Toyota Camry; Subaru Legacy and Outback; Ford Taurus Luxury cars: BMW 5 Series, Audi A6; Lexus GS 300 and 430 Upscale cars: BMW 3 Series Large cars: Toyota Avalon; Pontiac Bonneville Sporty cars: Mazda Miata; Ford Mustang; Ford Escape; Toyota Celica; Audi TT; BMW M3 SUV: Mazda Tribute; Toyota RAV4; Nissan Xterra; Toyota Highlander; Toyota 4Runner; Dodge Durango Trucks: Toyota Tacoma; Nissan Frontier; Toyota Tundra; Chevy Silverado Minivan: Honda Odyssey High Eciency of car models Small cars: Chevrolet Cavalier; Pontiac Sunfire Family cars: Pontiac Grand Prix; Dodge Intrepid; Chrysler Sebring; Pontiac Grand Am Luxury cars: Cadillac Seville Upscale cars: Saab 9-5; Volvo S80; Lincolns LS; Saab 9-3 Large cars: Buicks Park Avenue Sporty cars: BMW Z Series SUV: Isuzu Trooper Trucks: GMC Sonoma Minivan: Chrysler Voyager; Town & Country; Nissan Quest Small cars: Dodge Neon Family cars: Saturn L-Series; Mercury Sable Luxury cars: Cadillac DeVille; Lincolns Town Car; Lincolns Continental Upscale cars: Chrysler 300M; Infiniti I35; Mercedes-Benz C-Class Large cars: Buick LeSabre; Ford Crown Victoria Sporty cars: Audi TT; Pontiac Firebird; Mercury Cougar SUV: Chevrolet Tracker; Suzuki Vitara; Isuzu Rodeo Sport; Suzuki Vitara/XL-7; Mitsubishi Montero Trucks: Ford Ranger; Chevrolet S-10; Mazda Truck; GMC Sierra Minivan: Toyota Sienna; Caravan/Grand Caravan; Mazda MPV; Ford Windstar Least

Low

Figure 1 Car model efficiency vs consumers most wanted

being wanted of efficient car models could be the result of poor market positioning or the lack of effort in convincing consumers of the excellence of product attributes. Otherwise these car models are viable. With an effective promotion and positioning strategy, the producers should be able to move these car models to the upper-right quadrant. Car models located in the upper-left quadrant are the lucky ones, which are wanted by consumers despite their low efficiency scores. Longterm viability should be expected from them through scope for improved efficiency, a possible result of developing salient and unique benefits to differentiate from competitors. Car models in the bottom-left quadrant offer low efficiency and are not much desired by consumers. There is scope for improvement in the product features and hence the overall efficiency

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of these car models. The producers also need to develop more effective marketing promotion or positioning strategies to improve the overall marketing performance of these car models. Furthermore, it is found that car models in different car categories are not distributed in the same pattern as depicted in the four quadrants of Figure 1. Figure 1 shows evidence that the degree of being wanted by consumers is not always consistent with the efficiency score. Clearly, no car models from categories of upscale cars, large cars and minivans are located in the upper-left quadrant (very few in the upper-right quadrant), but a significant number of car models from these three categories are found in the bottom-right quadrant. This indicates that better positioning and promotional strategies are needed to market these cars. Also, the majority of car models from the sporty and SUV categories are located in the two mis-perceived quadrants (upper-left and bottom-right). This might be due to the missing attribute of sportiness in our DEA estimation.

Limitations and future research


While we went to considerable lengths to develop a list of attributes for use in this study, failure to incorporate attributes that are idiosyncratic to a small group of consumers could still lead to biases in our efficiency estimates. There is a need to study this problem and to find ways of overcoming it. There are some attributes beyond the objective attributes considered in our model that distinguish car models, such as mechanical quality, body and interior quality, feature and accessory quality, performance, comfort, style and reliability. Although our data are able to distinguish between general attributes that may create large amounts of efficiency/inefficiency, they may not be 100% comprehensive and may fail to account for those attributes that lead to small price differences between otherwise similar models. As noted earlier, this might be a general problem in applying DEA to complex products with dimensions that are difficult to describe objectively. Cars are extremely differentiated products, and models can differ from one another in many characteristics. Any conclusion derived from our approach is conditional on the assumption that all relevant attributes have been considered. Accordingly, the exclusion of a potentially relevant attribute such as sportiness may have resulted in efficiency ratios that in part reflect the cost of this missing attribute to consumers. Unfortunately, this characteristic cannot easily be measured and is not addressed in this study. Nevertheless, this study provides potential buyers with information on the objective qualities of a considered car and alternative models.

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Since explicit weights are given to car characteristics, if a considered car accelerates slowly and is limited in horsepower, that car might be perfectly efficient to a potential buyer who is not interested in these criteria. Professional tests in this field can calculate how expensive the horsepower of an Audi is, how high the shadow price of safety for a Volvo is, or how expensive the design of a BMW is.

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About the author


Pingjun Jiang is an Associate Professor of Marketing in the School of Business, La Salle University, Pennsylvania, US. She received her PhD degree from The Southern Illinois University. Her research interests include e-commerce, consumer behaviour, pricing strategy and research methodology. She has published papers in the following publications: Psychology & Marketing, European Journal of Marketing, Journal of Services Marketing, Journal of Product and Brand Management, Internet Research, and Proceedings of American Marketing Association Educators Conferences. Address correspondence to: Department of Marketing, School of Business Administration, La Salle University, Philadelphia, PA 19141, US. Email: jiang@lasalle.edu

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