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According to the neoclassical approach, input prices as a measure of resources scarcity induce firms to cost-minimizing and efficient allocation of recourses. But when the prices are distorted, the effective competitive inputs are used inefficiently and have resulted in under- or over-utilization of production factors relative to their endowments or allocative inefficiency. In this paper, the shadow cost approach and system of equations are used to estimate allocative inefficiency using the Iran's manufacturing data over the period 1976-2006. The results show that there is strong allocative inefficiency and increasing cost of production of firms in Iran's Manufacturing Sector.

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The main purpose of this paper is to investigate the effect of market structure on innovation and R&D in Iran’s manufacturing sector. To do this, first, statistical data for Iran’s manufacturing sector has been gathered in International Standard Industrial Classification (ISIC) format, then mutual effects of concentration, innovation and R&D, advertising and profitability in different industrial activities have been analyzed using simultaneous equations system and Error Component Tow Stage Least Squares (EC2SLS) during 1996-2007. The results show that industrial concentration has a significant and inverted U-shaped relationship with innovation and R&D. In addition, R&D expenditure declines with increases in profitability. The investigation of the factors affecting manufacturing structure indicates that although innovation and R&D has no effect on manufacturing structure, but profitability and performance of top firms affect their concentration. Our findings exhibit the ineffectiveness of concentration and innovational behavior on industries performance; whereas increasing market concentration results in advertising expenses and innovational behavior of firms raises advertising expenses. Similarly, the lagged and accumulated effects of R&D confirm the existence of an inverted U-shaped relationship between concentration and R&D