Industry structural inefficiency and potential gains from mergers and break-ups: A comprehensive approach

• An indicator of industry inefficiency is proposed.
• The indicator is decomposed in various sources components.
• The main sources are: technical inefficiency and organizational inefficiency.
• Possible efficiency gains from mergers and break-ups operations are discussed.
• An empirical application to public hospitals is provided.

An efficiency indicator of industry configuration (allowing for entry/exit of firms) is presented which accounts for four sources components: (1) size inefficiencies arising from firms which can be conveniently split into smaller units; (2) efficiency gains realized through merger of firms; (3) re-allocation of inputs and outputs among firms; (4) technical inefficiencies. The indicator and its components are computed using linear and mixed-integer programming (data envelopment analysis models). A method to monitor the evolution of these components in time is introduced. Data on hospitals in Australia show that technical inefficiency of hospitals accounts for less than 15% of total industry inefficiency, with 40% attributable to size inefficiencies and the rest to potential mergers and re-allocation effects.