- A Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 18 Nov 2019
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
- Businesses happy to satisfice profits rather than optimise
- Some state-owned organisations might display some X-inefficiency if they are set politically motivated targets
- Patents may lead to X-inefficiency since legal protection can lead to firms believing they are immune from day-to-day competition
- 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
- Without competition, firms might source from higher-priced suppliers