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Competition, Cost Innovation, and X-inefficiency in Experimental Markets

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  • Andrew Smyth

    (Chapman University)

Abstract

This paper examines the relationship between competition, cost innovation, and x-inefficiency in experimental markets. In the lab, oligopolists make closer-to-optimal cost innovation expenditures than do monopolists, which result in lower x-inefficiency in oligopoly than in monopoly. Oligopolies also increase total surplus relative to monopoly, and consumer surplus makes up a larger portion of total surplus in oligopoly than monopoly. The data illustrate how x-inefficiency affects surplus dynamically and suggest price as a mechanism by which competitive pressure increases cost efficiency.

Suggested Citation

  • Andrew Smyth, 2016. "Competition, Cost Innovation, and X-inefficiency in Experimental Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(3), pages 307-331, May.
    • Handle: RePEc:kap:revind:v:48:y:2016:i:3:d:10.1007_s11151-015-9487-7
    DOI: 10.1007/s11151-015-9487-7
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    References listed on IDEAS

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    1. Leibenstein, Harvey, 1978. "On the Basic Proposition of X-Efficiency Theory," American Economic Review, American Economic Association, vol. 68(2), pages 328-332, May.
    2. Ben Greiner, 2015. "Subject pool recruitment procedures: organizing experiments with ORSEE," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 1(1), pages 114-125, July.
    3. Donja Darai & Dario Sacco & Armin Schmutzler, 2010. "Competition and innovation: an experimental investigation," Experimental Economics, Springer;Economic Science Association, vol. 13(4), pages 439-460, December.
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    5. Philippe Aghion & Stefan Bechtold & Lea Cassar & Holger Herz, 2018. "The Causal Effects of Competition on Innovation: Experimental Evidence," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(2), pages 162-195.
    6. Martin, Stephen, 2010. "Industrial Organization in Context," OUP Catalogue, Oxford University Press, number 9780199291199.
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    8. Stigler, George J, 1976. "The Xistence of X-Efficiency," American Economic Review, American Economic Association, vol. 66(1), pages 213-216, March.
    9. Isaac, R. Mark & Reynolds, Stanley S., 1992. "Schumpeterian competition in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 59-100, January.
    10. Sacco, Dario & Schmutzler, Armin, 2011. "Is there a U-shaped relation between competition and investment?," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 65-73, January.
    11. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    Cited by:

    1. Andrew Smyth, 2017. "How Product Innovation Can Affect Price Collusion," Working Papers 17-26, Chapman University, Economic Science Institute.

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