The Profit-Structure Relationship Accounting for Technical and Allocative Efficiency: an application to the Italian Factoring Industry

This paper investigates the profit-structure relationship in the Italian factoring industry over the period 1993-97. Differently from the previous literature, we have used Data Envelopment Analysis (DEA) to estimate efficiency measures. Although this innovation may imply a greater amount of noise in regression analyses undertaken, this method appear to be more appropriate than the parametric estimate in consideration of the small number of observations available. In addition, DEA allows us to consider three efficiency terms (i.e. Technical, Allocative and Scale efficiency), rather than the two traditionally employed (i.e. X-efficiency and Scale efficiency) in the literature. The introduction of the allocative efficiency is particularly interesting because it allows us to restate the Relative-Market Power (RMP) hypotheses and to extend the Efficiency-Structure (ES) hypotheses. In this first stage, we found a positive relationship between firms profits and market structure variables (both CONC and MS): this relationship should be interpreted as a support to the ES hypotheses (especially of the TE-EFF version) rather than to the RMP hypotheses. In the second stage, when allocative efficiency is introduced, results differ substantially: 1) the positive profit-structure relationship is now observed for MS, but not for CONC; 2) only the TE-EFF version of the ES hypothesis is supported, but not in the other two; 3) when Technical and Scale efficiency measures are directly considered, coefficients predicted by RMP hypotheses are not observed. In the final stage, prices regressions were re-run by using a unique indicator of all prices charged. The coefficient signs predicted by the RMP and by the ES hypotheses were not observed and none of the hypotheses appear to be supported. These latter findings, together with the fact that some of these relationships have not been previously analysed, seem to require further research along these lines.