This paper derives from a project on Dynamic Efficiency and Corporate Performance, financed by the ESRC Functioning of Markets Initiative (project number: WI02251013). In research for the paper we have been greatly assisted by I. Ganoulis, who prepared the data set, and John Roe and Catherine Gwilliam, who showed us how to derive equation (6). Very helpful comments on previous versions were received from Katy Graddy, Steve Nickell, Robin Nuttall, Andrew Oswald, Howard Smith, John Vickers and two referees from this Journal.
THE EFFICIENCY OF FIRMS: WHAT DIFFERENCE DOES COMPETITION MAKE?*
Version of Record online: 30 JAN 2012
Royal Economic Society 1997
The Economic Journal
Volume 107, Issue 442, pages 597–617, May 1997
How to Cite
Hay, D. A. and Liu, G. S. (1997), THE EFFICIENCY OF FIRMS: WHAT DIFFERENCE DOES COMPETITION MAKE?. The Economic Journal, 107: 597–617. doi: 10.1111/j.1468-0297.1997.tb00029.x
- Issue online: 30 JAN 2012
- Version of Record online: 30 JAN 2012
- Date of receipt of final typescript: June 1996
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.