Estimating production technical efficiency for the US biopharmaceutical industry

Abstract

This article estimates the production technical efficiency of pharmaceutical companies and biotechnology companies under heterogeneous technologies. We employ metafrontier analysis to estimate the production metafrontier technical efficiency during the period 1989–2007. When using traditional stochastic frontier analysis, the results show that the technical efficiency of the biotechnology companies is smaller than that of the pharmaceutical companies. However, when using metafrontier analysis, the technical efficiency of the biotechnology companies is found to be significantly higher than that of the pharmaceutical companies. Thus, using the traditional stochastic frontier analysis to estimate the production technical efficiency of the biopharmaceutical industry may lead to erroneous conclusions. This paper has the advantage of being able to solve the possible bias that might arise from assuming that frontiers are identical as in conventional studies, and the inefficiencies can be evaluated elastically an...