Document de travail du LEM
MEASURING MARKET EFFICIENCY REVISITED:
HOW TO MAKE COMPARISONS ACROSS MARKETS?
Ruben Chumpitaz*, Kristiaan Kerstens*,
Nicholas Paparoidamis*, Matthias Staat**
CNRS-LEM (UMR 8179), IESEG School of Management, 3 rue de la Digue, F-59000
Lille, France, Tel: +33 320545892, Fax: +33 320574855. Correspondence to K.
University of Mannheim, Department of Economics, D-68131 Mannheim, Germany, Tel.
+49 6211811894, Fax. +49 6211811893, email@example.com.
The use of non-parametric frontier methods for the evaluation of product market efficiency in
heterogeneous markets seems to have gained some popularity recently. However, the statistical
properties of these frontier estimators have been largely ignored. The main point is that non-
parametric frontier estimators are biased and that the degree of bias depends on specific sample
properties, most importantly sample size and number of dimensions of the model. To investigate
the effect of this bias on comparing market efficiency, this contribution estimates the efficiency
for several datasets for two main product categories and, following Zhang and Bartels (1998),
re-estimates these results for the larger samples limiting their size to that of the smaller samples.
Furthermore, sample sizes are adjusted to neutralise the eventual differences in dimensions in
specification. This allows comparing market efficiency for different markets on an equal
footing, since it reduces the bias effect to a minimum making the comparison of market
efficiency possible. These results offer a fair warning against taking average market efficiency
results at face value when comparing them across markets.
Keywords: Market Efficiency, Heterogeneous Product Markets, Bias, Monte-Carlo Simulation
Recently, a number of studies assessing the efficiency of heterogeneous product markets using