Review of Industrial Organization

, Volume 48, Issue 3, pp 307–331 | Cite as

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

Article
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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.

Keywords

X-inefficiency Cost innovation Experimental economics 

Notes

Acknowledgments

I am grateful to Mark Isaac, Taylor Jaworski, Stanley Reynolds, Cortney Rodet, and Bart Wilson for helpful comments and discussion and to Philip Brookins and John Jensenius for programming advice. I also thank my dissertation committee and participants at the xs/fs Experimental Reading Group at Florida State and the 2013 Public Choice Society Conference. Finally, I thank two anonymous referees and especially Lawrence White for comments that have greatly improved this paper. Naturally, any errors are my own.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Economic Science InstituteChapman UniversityOrangeUSA

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