X efficiency

DEFINITION of X efficiency

X efficiency refers to a company’s inability to get the maximum output for its inputs due to a lack of competitive pressure. X Inefficiency could be caused by monopoly power, or state control, but also by many other reasons.

WHAT IT IS IN ESSENCE

X efficiency and X inefficiency refer to the ability or inability of a business to achieve maximum output for its inputs. The ‘inability’ is due to a lack of competition in the market, or a lack of desire to compete aggressively.

When commercial enterprises are not very competitive, as may occur in a monopoly, duopoly, or a market without many competitors, many of the workers and members of senior management tend not to behave as efficiently.

In simple words, X efficiency is the degree of efficiency that companies and people under conditions of imperfect competition maintain.

In a market where lots of competition exists, where the perfect competition exists, companies seek productive efficiency gains and produce at the lowest unit costs. Otherwise, they will probably lose sales to more efficient competitors.

Where there is defective competition, as occurs in a monopoly or duopoly, productive inefficiency may persist, because the lone producer can still thrive with inefficient production techniques.

HOW TO USE

The concept of X-efficiency suggests that we do not always maximize utility. Meaning, we do not always choose the most efficient option. Some of 98% of all organizations do not really understand what ‘true efficiency’ really is. Because they have the tendency to focus too much on individual and functional performance.

An example of X-efficiency is when a company employing workers but they aren’t necessary for production. For instance, a state-owned company may be more worried about the political implications and never getting rid of surplus workers. Or, due to the same reasons, does not even try to find cheaper suppliers.

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