A new study by Donald Hay and Guy Liu of Oxford University's Institute of Economics and Statistics gives some decisive answers to this much-debated question. Hay and Liu find positive relationships between a firm's efficiency and its market share. As might be expected, the relationship between efficiency and market share is generally weaker in sectors producing highly differentiated goods. This is because there is less price competition and hence relative efficiency is not so important in determining firm growth. In sectors where relative efficiency has a marked effect on market share, there is likely to be pressure on managers to enhance the relative efficiency of their firms either to gain market share or to avoid losing it to competitors.
Firms are also very responsive to improvements in efficiency by their market rivals.
The authors are affiliated to the Institute of Economics and Statistics at Oxford University. Their results derive from a project on Dynamic Efficiency and Corporate Performance financed by the ESRC Functioning of Markets Initiative.