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

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  • Lee, Chia-Yen

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.

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  • Lee, Chia-Yen, 2016. "Nash-profit efficiency: A measure of changes in market structures," European Journal of Operational Research, Elsevier, vol. 255(2), pages 659-663.
    • Handle: RePEc:eee:ejores:v:255:y:2016:i:2:p:659-663
    DOI: 10.1016/j.ejor.2016.05.051
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    Cited by:

    1. Ke Wang & Yujiao Xian & Chia-Yen Lee & Yi-Ming Wei & Zhimin Huang, 2019. "On selecting directions for directional distance functions in a non-parametric framework: a review," Annals of Operations Research, Springer, vol. 278(1), pages 43-76, July.
    2. Lee, Chia-Yen & Wang, Ke, 2019. "Nash marginal abatement cost estimation of air pollutant emissions using the stochastic semi-nonparametric frontier," European Journal of Operational Research, Elsevier, vol. 273(1), pages 390-400.
    3. Mel T. Devine & Valentin Bertsch, 2023. "The role of demand response in mitigating market power: a quantitative analysis using a stochastic market equilibrium model," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(2), pages 555-597, June.
    4. Fangqing Wei & Junfei Chu & Jiayun Song & Feng Yang, 2019. "A cross-bargaining game approach for direction selection in the directional distance function," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 41(3), pages 787-807, September.
    5. Chen, Xiang & Grifell-Tatjé, Emili & Fu, Tsu-Tan, 2023. "A profit difference decomposition model for measuring group performance: an application to Chinese and Taiwanese commercial banks," Omega, Elsevier, vol. 120(C).
    6. Tseng, Chin-Yi & Lee, Chia-Yen & Wang, Qunwei & Wu, Changsong, 2022. "Data envelopment analysis and stochastic equilibrium analysis for market power investigation in a bi-level market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 161(C).
    7. Sebastián Lozano & Narges Soltani, 2018. "DEA target setting using lexicographic and endogenous directional distance function approaches," Journal of Productivity Analysis, Springer, vol. 50(1), pages 55-70, October.
    8. Devine, Mel T. & Bertsch, Valentin, 2018. "Examining the benefits of load shedding strategies using a rolling-horizon stochastic mixed complementarity equilibrium model," European Journal of Operational Research, Elsevier, vol. 267(2), pages 643-658.
    9. Chia-Yen Lee & Chin-Yi Tseng, 2023. "Market Power and Efficiency Analysis in Bi-level Energy Transmission Market," Journal of Optimization Theory and Applications, Springer, vol. 196(2), pages 544-569, February.
    10. Lee, Chia-Yen, 2018. "Mixed-strategy Nash equilibrium in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1013-1024.
    11. Bertsch, Valentin & Devine, Mel, 2019. "The Role of Demand Response in Mitigating Market Power — A Quantitative Analysis Using a Stochastic Market Equilibrium Model," Papers WP635, Economic and Social Research Institute (ESRI).
    12. Devine, Mel T. & Siddiqui, Sauleh, 2023. "Strategic investment decisions in an oligopoly with a competitive fringe: An equilibrium problem with equilibrium constraints approach," European Journal of Operational Research, Elsevier, vol. 306(3), pages 1473-1494.
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