What is X-Efficiency?

X-Efficiency refers to the behavior, performance and efficiency that traders and firms maintain in imperfect competition. In a perfect market competition, elements of monopoly do not exist in the market and the prices of commodities are not controlled by individuals. Under perfect competition, firms and individuals are able to exhibit efficiency to the full potential which in turn cause them to make profits. In imperfect competition, the market structure tilts towards monopolistic competition and exhibit some features of competitive markets. The x-efficiency theory evaluates how inefficiency of individuals and firms is linked to imperfect competition.

How is the X-Efficiency Theory Used? 

In 1966, Harvey Leibenstein introduced the x-efficiency theory. This theory focuses on how efficiency are maintained by individuals and firms under imperfect competition. In his paper published in 1966 titled; "Allocative Efficiency vs. 'X-Efficiency, Harvey Leibenstein extensively discussed allocative efficiency and non-allocative efficiency in the market. The degree of competition and the effects of competitive pressure on individuals and firms determine how efficient or inefficient they would be. According to Leibenstein, unit costs are significantly influenced by x-efficiency. Although, the x-efficiency theory evaluates the level at which efficiency is mniatian by individuals and firms under imperfect competition, there are certain drawbacks of the concept. The x-efficiency theory is regarded as a controversial theory because it antagonizes a popular economic theory; utility-maximizing behavior. Hence, there is a conflict between the acceptance of the acceptance of the x-efficiency theory over the utility-maximizing theory. X-efficiency is a concept that is applicable in diverse fields or disciplines such as bureaucracy, property rights, entrepreneurship, economic development and others.

Related Topics

• Market Structure
• Perfect Competition
• Bidding War
• Complements & Substitutes
• Substitution Effect
• Imperfect Competition
• Market Power
• Price Takers
• Price Makers 
• Perfect Competition and Decision Making
• X-Efficiency
• Captive Market
• Contestable Market Theory
• Highest Profit Point in a Perfectly Competitive Market
• Marginal Revenue
• Using Marginal Revenue and Marginal Costs to Maximize Profit
• Marginal Revenue Curve
• Profit Margin and Average Total Cost
• Break Even Point - Cost Curve
• Shutdown Point - Cost Curve
• Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
• Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
• Long-Run Average Supply (LRAS)
• Decisions to Enter or Exit a Market in the Long Run
• Long-Run Equilibrium in a Perfectly Competitive Market
• Constant, Increasing, and Decreasing Cost Industries
• Productive and Allocative Efficiency in Perfectly Competitive Markets
• Market Efficiency
• Market Inefficiency
• Pareto Efficiency
• Market Failure 
• Search Theory
• Monopoly
• Natural Monopoly
• Legal Monopoly
• Bilateral Monopoly
• Promoting Innovation through Intellectual Property
• Predatory Pricing
• How Monopolists Set Price with the Demand Curve
• Total Cost and Total Revenue for a Monopolist
• Marginal Revenue and Marginal Cost for a Monopolist
• Inefficiency of Monopoly
• Perfectly Competitive Market
• Monopolistic Competition
• Duopoly
• Oligopoly
• Differentiated Products
• Perceived Demand for a Monopolistic Competitor
• Monopolistic Competitors Choose Price and Quantity
• Monopolistic Competitors and Entry
• Monopolistic Competition and Efficiency
• Cartel (Economics)
• Game Theory
• Traveler's Dilemma
• Prisoner's Dilemma
• Iterated Prisoner's Dilemma
• Nash Equilibrium
• Diner's Dilemma
• Trembling Hand Perfect Equilibrium
• Gambler's Fallacy
• Arrows Impossibility Theorem
• Backward Induction
• Tournament Theory
• Oligopoly and the Prisoner’s Dilemma
• Forcing Cooperation in a Prisoner’s Dilemma
• Cooperation and the Kinked Demand Curve
• Corporate Merger or Acquisition
• Antitrust Laws
• Herfindahl-Hirschman Index
• Concentration Ratio
• Other Approaches to Measuring Monopoly Power in an Industry
• Restrictive Practices under Antitrust Law
• Natural Monopoly
• Cost-Plus Regulation
• Price Cap Regulation
• Regulatory Capture