Trends and possible nexus between profit efficiency and market concentration in Indian leather industry: a panel frontier analysis of major Indian leather-manufacturing states

The present study is an empirical investigation to explore the trend in profit efficiency and its components such as cost, revenue, technical, allocative, and scale efficiency scores using data for nine major leather-producing states of India, from 1986 to 2016. The leather industry of India is highly concentrated only in a few states. Therefore, the present study was undertaken to identify the source of profit efficiency as a possible source of market concentration and vice versa. A window-based data envelopment analysis technique has been employed to compute all efficiency scores. At the same time, panel data Bayesian vector autoregressive (BVAR) analysis has been used to investigate the causality of market concentration with profit efficiency and its sources. The results show that there was 76 per cent profit inefficiency in the Indian leather industry which means that the Indian leather industry could have made 76 per cent more profit during the sample period of 36 years. The profit inefficiency was mainly attributed to cost inefficiency. The cost inefficiency is at the tune of 55 per cent and is further attributed to managerial inefficiency. Besides, panel data BVAR model estimation through forecast error variance decomposition and impulse response graphs represents that there is unidirectional causality from market concentration to profit efficiency in general and revenue efficiency in particular. The causality from profit efficiency to concentration is found to be missing. The industrial policy of 1991 has improved PE as both the components: cost and revenue efficiency, have been significantly uplifted.