X-inefficiency

In this short revision topic video, we look at the concept of X-inefficiency.

Typically we use the term x-inefficiency when analysing costs in imperfectly competitive markets such as monopoly, duopoly and oligopoly.

X-inefficiency happens when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable.

This leads to a loss of technical / productive efficiency.

Root causes of X-inefficiency

1. Businesses happy to satisfice profits rather than optimise
2. Some state-owned organisations might display some X-inefficiency if they are set politically motivated targets
3. Patents may lead to X-inefficiency since legal protection can lead to firms believing they are immune from day-to-day competition
4. May happen in firms where there is a clear principal-agent problem i.e. management are pursuing alternative objectives to shareholders who do not monitor their decisions in detail
5. Without competition, firms might source from higher-priced suppliers