What is X-efficiency?

The degree of efficiency maintained by firms in the face of imperfect competition is referred to as X-efficiency.

The degree of efficiency maintained by firms in the face of imperfect competition is referred to as X-efficiency. In this context, efficiency refers to a company getting the most out of its inputs, such as employee productivity and manufacturing efficiency. Firms are forced to be as efficient as possible in a highly competitive market to ensure strong profits and continued existence. This is not true in situations characterized by imperfect competition, such as a monopoly or duopoly.

The terms x-efficiency and x-inefficiency refer to the same economic concept. It measures how close a firm is to optimal efficiency in a given market.

A company, for example, may be 0.85 x-efficient, which means it is operating at 85% of its maximum efficiency. In a market with significant government controls and state-owned enterprises, this would be considered extremely high. The same measurement is used for X-inefficiency, but the emphasis is on the difference between current and potential efficiency. In the same market as the previous company, a state-owned enterprise may have an x-efficiency ratio of 0.35, indicating that it is only operating at 35% of its optimal efficiency. In this case, the firm may be referred to as x-inefficient to highlight the large gap, despite the fact that it is not.