X-inefficiency
(also called x-[in]efficiency or the theory of x-inefficiency)
(also called x-[in]efficiency or the theory of x-inefficiency)
DESCRIPTION
Inefficiency in a firm arising when the average cost of producing a product at a particular level of output exceeds the lowest possible average cost of producing that output.
Inefficiency in a firm arising when the average cost of producing a product at a particular level of output exceeds the lowest possible average cost of producing that output.
KEY INSIGHTS
Developed in pioneering research by Leibenstein (1966), x-inefficiency, or the theory of x-inefficiency, contrasts with x-efficiency (or allocative economic efficiency) where price equals marginal cost. While owners of firms seek to maximize profits, x-inefficiencies may arise when management practices of firms conflict with such a goal (e.g. where management practices are aimed at increasing salaries, departmental power, etc.) and where the result is that the firm produces at an average cost above the average total cost where price equals marginal cost.
Developed in pioneering research by Leibenstein (1966), x-inefficiency, or the theory of x-inefficiency, contrasts with x-efficiency (or allocative economic efficiency) where price equals marginal cost. While owners of firms seek to maximize profits, x-inefficiencies may arise when management practices of firms conflict with such a goal (e.g. where management practices are aimed at increasing salaries, departmental power, etc.) and where the result is that the firm produces at an average cost above the average total cost where price equals marginal cost.
KEYWORDS Economic efficiency, production costs, price
IMPLICATIONS
In highly competitive industries, the survival of a firm may be jeopardized if it is x-inefficient. Marketing managers must therefore be aware of the pursuit and implementation of management practices that are likely to result in excessive costs that ultimately become the source of x-inefficiency.
In highly competitive industries, the survival of a firm may be jeopardized if it is x-inefficient. Marketing managers must therefore be aware of the pursuit and implementation of management practices that are likely to result in excessive costs that ultimately become the source of x-inefficiency.
APPLICATION AREAS AND FURTHER READINGS
Marketing Strategy
Stigler, George J. (1976). ‘The Xistence of X-Efficiency,’ American Economic Review, 66(1), March, 213–216.
Stigler, George J. (1976). ‘The Xistence of X-Efficiency,’ American Economic Review, 66(1), March, 213–216.
Lang, Mahlon G. (1980). ‘Marketing Alternatives and Resource Allocation: Case Studies of Collective Bargaining,’ American Journal of Agricultural Economics, 62(4), November, 760–765.
Tefula, Moses (2002). The Implications of X-Inefficiency on the Banking Sector in Africa. Manchester: Institute for Development Policy and Management, University of Manchester.
Anderson, R. I., Fok, R., Zumpano, L. V., and Elder, H. W. (1998). ‘The Efficiency of Franchising in the Residential Real Estate Brokerage Market,’ Journal of Consumer Marketing, 15(4), 386–396.
BIBLIOGRAPHY
Leibenstein, Harvey (1966). ‘Allocative Efficiency and X-Efficiency,’ American Economic Review, 56, 392–415.
Leibenstein, Harvey (1966). ‘Allocative Efficiency and X-Efficiency,’ American Economic Review, 56, 392–415.