Integrating Consumer satisfaction into Productivity Indexes

The purpose of this paper is to include consumer satisfaction in the specification of productivity. We accomplish this by using Shephard’s preference indirect distance function to model technology subject to a utility target. The utility constraint allows us to include information on consumer satisfaction. The preference indirect distance function is then used to construct a Malmquist type of productivity index. As with the usual Malmquist productivity index, we can decompose productivity change into changes in technology and changes in efficiency. In addition, we show how to derive a quality change component. The technique is illustrated by an application to Swedish pharmacies.