Nash-profit efficiency: A measure of changes in market structures

Chia-Yen Lee

European Journal of Operational Research, 2016, vol. 255, issue 2, 659-663

Abstract: Imperfectly competitive markets can be characterized by endogenous prices, limited or no competition, and the exercise of market power. To address the resulting dysfunctionality, this study proposes an alternative efficiency measure estimated by the directional distance function (DDF) with the direction toward Nash equilibrium, and develops the Nash-profit efficiency (NPE) and its decomposition which complements the typical profit efficiency measure. We model the production possibility set and the price functions of inputs and outputs, and then develop the mixed complementarity problem (MiCP). We validate the model with an empirical study of the oil and natural gas industry in New York State between 1981 and 1989. The results show that before 1984, firms exploited a less competitive market; that between 1984 and 1986, the number of new entrants transformed the market; and that after 1986, no firms could exercise market power due to market restructuring (deregulation) and an unforeseen oil glut. Based on the results, we conclude that the direction toward Nash equilibrium can be justified for efficiency estimation in imperfectly competitive markets, and that NPE is appropriate for investigating changes in market structures.

Keywords: Data envelopment analysis; Nash equilibrium; Imperfectly competitive market; Mixed complementarity problem; Oil and natural gas industry (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221716303885
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:255:y:2016:i:2:p:659-663

DOI: 10.1016/j.ejor.2016.05.051

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().