A firm is efficient if it can produce maximum output from its inputs. However, due to the lack of competition in the market, the firm may not have the incentive to achieve the efficient outcome. This inefficiency is called X-inefficiency.

A monopolist may be X-inefficient either because it does not have an incentive to be more efficient due to lack of competition or it does not have the opportunity to observe and learn from other more efficient firms in the industry. In an industry high profits may imply high prices due to x-inefficiency. However, excess profits do not necessarily mean that consumers are paying higher prices. And, lack of excess profit does not necessarily indicate competition or cost efficiency. Leibenstein, Harvey. 1966. "Allocative Efficiency vs. 'X-Efficiency'," American Economic Review 56, (June), pp. 392-415