Abstract The dairy farmers in Iran are faced with milk price distortion due to the market imperfection. To measure an unbiased farm-specific efficiency, prices should be adjusted in an imperfect market. To examine this issue, a shadow-price profit frontier was applied to a sample of 860 Iranian small intensive dairy farms surveyed in 2005-06 in order to calculate profit efficiency of individual dairy farmers. This adjusted measure was then compared with that of unadjusted measure that assumes undistorted market. A multiple general linear model (GLM) technique was applied to the data to examine the multiple effects of pure-bred animals, and the used farm capacity on profit efficiency indices. The mean value of adjusted profit efficiency was 0.40, significantly different from the latter measure, i.e. 0.72, revealing overstating efficiency by ignoring imperfect structure of market. The difference between the figures is attributed to an index of market efficiency that was estimated of 46% in average. The number of pure-bred animals in the herd was found to affect the profit efficiency indices. Regardless of their characteristics, all the farms can gain from correcting the distortion in milk market, where small and average- sized farms are domain farms in the country.

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