Efficiency measures for industrial organization

The aim of the paper is to measure the efficiency of an industry, and to decompose it into firm efficiencies—which indicate how close firms approximate best practices—and an organization efficiency—which indicates the degree of optimality of the number of firms and their distribution. The latter component provides an efficiency measure for the industrial organization. Economies or diseconomies of scale and of scope play a big role in the determination of the optimal industrial organization and the consequent measurement of the efficiency of an observed industry. Different approaches to the modeling of scale economies will be reviewed. The paper shows in detail how the efficiency of an industrial organization can be measured as a gap between mean firm efficiency and overall industry efficiency. The analysis is extended to dynamic models, to measure the role of entry and exit in the efficiency of industrial organization.