Perfect Competition

Perfect Competition

Large number of buyers and sellersLarge number of buyers and sellers No product differentiationNo product differentiation Low barriers to entry and exitLow barriers to entry and exit Perfect and equal informationPerfect and equal information No price restrictions & no collusionNo price restrictions & no collusion

Market Individual

S

D

d

s=MC

Farmer’s as price takers

Consequences of Perfect Competition

Individuals are price takersIndividuals are price takers profits by costsprofits by costs Cost - price squeezeCost - price squeeze Don’t perceive horizontal competitionDon’t perceive horizontal competition Marketing decisions areMarketing decisions are

» Time, place, and form

Monopoly

One sellerOne seller Price setterPrice setter

» Firm supply is the market supply

ExamplesExamples» Utilities, cable TV

» Often regulated

D

MR Q

P S

QM

PM

MR=MCPC

Monopoly Supply and Demand

Monosony

One buyerOne buyer Price setterPrice setter

» Firm demand in market demand

Depend on market definitionDepend on market definition» Time, form, place

Monopoly / Monosony

Success depends onSuccess depends on» Barriers to entry

» Closeness of substitutes

Regional markets ????Regional markets ????

Oligopoly / Oligopsony

Few sellers or buyersFew sellers or buyers Individuals can influence priceIndividuals can influence price

» Co-exist with rivals» More stable prices

Optimal output is less than profit Optimal output is less than profit max output for any one firmmax output for any one firm

Oligopoly / Oligopsony

Often price leader/followerOften price leader/follower Emphasis on non-price comp.Emphasis on non-price comp. ExamplesExamples

» Autos, farm equipment, cereals

Oligopoly / Oligopsony

Incentive to try cartelsIncentive to try cartels» Work together to set supply or price

Some government sponsoredSome government sponsored» OPEC

» Marketing Boards

» Illegal in US

Monopolistic Competition

Between olig and perfect comp.Between olig and perfect comp. Relatively few firmsRelatively few firms Many close substitutesMany close substitutes Try to differentiate productTry to differentiate product

Monopolistic Competition

Very elastic demandVery elastic demand Prices nearly alike as Prices nearly alike as

consumers will switchconsumers will switch Emphasis on non price comp.Emphasis on non price comp.

» Pricing strategy

» Carcass merit, value based marketing

Structure and performance

Perfect competition will Perfect competition will produce output and aggregate produce output and aggregate price with the greatest price with the greatest operational efficiencyoperational efficiency

Monopoly has the lowest Monopoly has the lowest operational efficiencyoperational efficiency

Structure and performance

Olig & Mono Comp Olig & Mono Comp » In between perfect and monopoly

» Often lead to:–Excess capacity–Excess non-price competition

Competitive Conditions

Farm markets are near perfect Farm markets are near perfect competition but changingcompetition but changing» Product differentiation

» Branded products

» Advertising

» Promotion

Market Concentration Percent of sales by largest firmsPercent of sales by largest firms 4 firm concentration ratio CR44 firm concentration ratio CR4

» Strong olig CR4 > 50%» Weak olig CR4 33-50%» Unconcentrated CR4 < 33

Competition as concentration Competition as concentration All types in AgAll types in Ag

CR4 in Ag

Cattle slaughterCattle slaughter 6767 Steer and heifer slaughterSteer and heifer slaughter 8080 Hog slaughterHog slaughter 5656 Soybean millsSoybean mills 7171 Fluid milk Fluid milk 2222 Poultry processingPoultry processing 3434 Breakfast cerealBreakfast cereal 8585

Leaders

BeefBeef» IBP/Tyson, Excel/Cargill,

Swift/Conagra, Farmland, Smithfield

PorkPork» Smithfield, IBP/Tyson, Excel/Cargill,

Hormel

Leaders Grain HandlingGrain Handling

» ADM, Cargill, Bunge, Cenex Harvest States, Peavey/Conagra

Ag ChemicalsAg Chemicals» Bayer CropScience (Aventis), Syngenta,

Monsanto, BASF, Dow Agrosciences SeedsSeeds

» DuPont (Pioneer), Monsanto, Syngenta, Groupe Limagrain, Grupo Pulsar

Concentration and Market Definition

Iowa steer and heifer slaughterIowa steer and heifer slaughter US steer and heifer slaughterUS steer and heifer slaughter US cattle slaughterUS cattle slaughter All livestock slaughterAll livestock slaughter All protein productionAll protein production

Barriers to Entry

Key resourcesKey resources» Inputs, $$$, skills

» Patent

Economies of scaleEconomies of scale LocationLocation InformationInformation

Workable Competition

Enough buyers and sellers to Enough buyers and sellers to provide alternativesprovide alternatives

No one can coerce a rivalNo one can coerce a rival Firms respond to profit and lossFirms respond to profit and loss

Workable Competition

No collusionNo collusion Enough entry and exit for rivals to Enough entry and exit for rivals to

challengechallenge Free access of buyers and sellersFree access of buyers and sellers

Role of Government

Prevent or regulate monopolyPrevent or regulate monopoly Anti-trust laws to prevent Anti-trust laws to prevent

some types of behaviorsome types of behavior Coop laws to strengthen Coop laws to strengthen

smaller firms by banning smaller firms by banning togethertogether

Government Regulations Grain Inspection, Packers and Grain Inspection, Packers and

Stockyards Administration Stockyards Administration (GIPSA)(GIPSA)» Division of USDA» Regulation of markets and trade» http://www.usda.gov/gipsa/aboutus/bkgd2.htm

Federal Trade CommissionFederal Trade Commission» Anti-Trust investigations

Attorney General (State)Attorney General (State)

Concentration summary

More narrowly defined markets More narrowly defined markets are more concentratedare more concentrated

Integration is Integration is notnot concentration concentration Economies of scaleEconomies of scale

» Plant or firm level economies

» May drive concentration