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Abstract
This study investigates the drivers of profit inefficiency in the restaurant industry. Assuming that restaurants operate under monopolistic competition, we first present a characterization of the factors that explain restaurants’ departure from the profit frontier, focusing on the role of business experience, number of outlets, service model, restaurant typology, and COVID-19 shock. Based on Stochastic Frontier Analysis, we estimate how these factors explain the differences in profit inefficiency across firms using a panel dataset of 4128 restaurants in Sweden in the period 2017–2021. We find that the average level of profit efficiency is low (46%). Inefficiency increases with years in operation and is significantly higher among limited-service restaurants and single-outlet firms. Interestingly, no significant difference in profit inefficiency is detected during the COVID-19 pandemic. Our findings provide valuable insights for profit efficiency management.
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