THE EFFICIENCY OF FIRMS: WHAT DIFFERENCE DOES COMPETITION MAKE?*

Donald A. Hay · Guy S. Liu

175 citations0/0 files storedThe Economic Journal

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Efficiency Analysis Using DEA Merger and Competition Analysis Firm Innovation and Growth

Abstract

In Cournot oligopoly the efficiency of a firm relative to others determines its market share: this relationship gives an incentive to improve efficiency. The incentives are greater in markets where firm behaviour is more competitive. Components of firm efficiency are identified by frontier production function techniques in 19 UK manufacturing sectors: technical change, average efficiency of each firm relative to the frontier, and the efficiency of each firm relative to its own ‘best practice’ in each period. Short run declines in market shares and profits induce the firm to improve efficiency relative to its ‘best practice’. Long run differences in efficiency are correlated with differences in gross investment.

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References

1977Formulation and estimation of stochastic frontier production function models 1982Moral Hazard in Teams 1996Competition and Corporate Performance 1989Handbook of Industrial Organization 1984Production Frontiers and Panel Data 1983The Market Mechanism as an Incentive Scheme 1989Chapter 17 Empirical studies of industries with market power 1990Production frontiers with cross-sectional and time-series variation in efficiency levels

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