Lecture 8: Competition, Cooperation and Market Power Flashcards Preview

AGEC2102: Agribusiness Marketing > Lecture 8: Competition, Cooperation and Market Power > Flashcards

Flashcards in Lecture 8: Competition, Cooperation and Market Power Deck (25):
1

Types of competition in the food industry

– Product competition
– Firm competition
– Brand competition
– Inter-regional competition
– International competition
– Institutional competition
– Functional competition

2

– Product competition
– Firm competition
– Brand competition

– Product competition – between substitute products
– Firm competition – between sellers of similar products
– Brand competition – between brands of same product type

3

– Inter-regional competition
– Institutional competition
– Functional competition

– Inter-regional competition – between different regions
within a country
– Institutional competition – between different market
institutions (e.g. supermarket vs fast-food restaurant)
– Functional competition – between firms performing same
type of marketing function

4

Competition

- The level of competition and the behaviour of a firm is
influenced by the environment and structure of the industry in which it operates
- Industry structure may be the product of interacting
legal, political, social or economic institutions

5

Key characteristics/assumptions of perfect competition

– Homogenous products
– No barriers to entry/exit, with large number of firms
– Price-takers
– Perfect information

6

Why are farmers often considered to operate under perfect competition?

Because there are many farmers
producing largely homogenous commodities and
individually they have little influence on prices

7

Consequences for farmers in (nearly) perfectly
competitive markets:

– Farmers are price-takers in bulk commodity (wool, wheat,
etc) markets
– Only way to increase profit is to lower costs and improve
operational efficiency
– The principal marketing decisions for farmers are the
timing of sale, the place of sale, the form in which the
commodity is sold

8

Key characteristics/assumptions of Monopoly:

– No entry, one seller
– Price-setter
– Imperfect information

9

Market Structure: Monopoly

Usually, a monopoly will set prices above marginal
costs, which results in output less than equivalent
competitive market producer
– Artificial product scarcity is how monopolist increases
profits

10

Key characteristics/assumptions of Oligopoly:

– Homogenous products
– No entry – several sellers
– Collective market power
– Firm can set prices or quantity, but affects profits of other
firms and is affected by those other firms decisions

11

Market Structure: Oligopoly

- Industries which are highly concentrated – possibly Coles and Woolworths
- Firms sometimes choose to explicitly coordinate, by forming cartels to agree on prices, quantities, division of markets, profits, etc.
- Usually, cartel-like behaviour is illegal, unless sanctioned by the government
– Very hard to identify presence of cartel behaviour

12

Key characteristics/assumptions about monopolistic competition:

– Heterogenous products
– No entry barriers – many sellers
– Opportunities for market power (and price-setting) through product differentiation

13

Monopolistic competition market structure

Marketing strategies such as product innovation and
differentiation, packaging, branding, advertising,
discount policies are highly emphasised in monopolistic
competition
– Australian wine industry is best described by this model

14

Market Entry Barriers exist when

A firm cannot (easily) enter the market is profit opportunities emerge
– Licensing requirements, patents

15

Market barriers to entry are:

– Absolute cost advantage – one firm has superior
technology to produce output at lower cost than anybody
else in the market
– Economies of large-scale production
– Product differentiation – consumers goodwill for an
existing brand may inhibit competitors entry

16

• Market power

• Bargaining power

• Market power
– The ability to advantageously influence markets, market
behaviour, or market outcomes
• Bargaining power
– The relative strength of buyers and sellers in influencing
the terms of exchange in transaction

17

Market and bargaining power

• Market and bargaining power are defined in relative
terms
• Two ways to solve the market and bargaining power
issues
– Reduce the influence of the one with market power
– Increase the influence of the weaker to match the power
of the more powerful

18

Market power can be:

– Horizontal – influence that similar marketing function
agents have on each other and profits
– Vertical – influence up and down marketing system to
influence nature of activities/functions for profits
– Conglomerate – influence that comes from links to nonfood
companies

19

Types of bargaining power in the food industry:

– Opponent-pain – concerned with the influence of a buyer
or a seller in a negotiation gained through the ability to
threaten or make opponents worse off
– Opponent-gain – stems from the advantages that one
market party can offer to the other in exchange for
accepting terms
– Third-party-gain – a buyer and seller may agree to terms
that secure a gain from third parties (e.g. farmers,
consumers, other market agencies, government)

20

• Interrelated factors or market conditions associated
with market power in the food industry

– Size, number, and market concentration of firms
– Supply control
– Unequal information
– Diversification
– Product differentiation
– Control of strategic resources and decisions
– Financial resources
– Ratio of fixed-to-variable costs

21

Measuring market power

The degree of market power is often measured by the
four firm concentration ratio, CR4, measured by the
percent of market sales accounted for by the four
largest firms

22

Is a concentrated industry a problem?

– Maybe, if overall social welfare would be enhanced with
greater competition
– Maybe not, if more competition would decrease social
welfare
• Some industries benefit from firm level economies of
scale, which would lead to higher social welfare with
greater industry concentration
– Some don’t, and more competition is a good thing!

23

Cooperatives

• Cooperatives enable farmers to do collectively what
they cannot do independently as small-unit farmers
• Cooperatives alter the competitive structure of
markets, by permitting farmers to act as a single large
firm while maintaining their separate identities

24

• Based on tasks performed, there are four kinds of
cooperatives:

– Marketing cooperatives – sell farmers products
– Purchasing cooperatives – sell supplies to farmers
– Service cooperatives – provide members with improved
services
– Processing cooperatives – engage in processing and/or
packing the farmers products

25

Based on organisational structure, the cooperatives can
be:

– Independent local associations
– Federated associations
– Centralised cooperative associations
– Mixed associations