1. Chapter 9: Competition in Food Markets “When products compete, they get better” Created by Tad Mueller Northeast Iowa Community College

2. Perfect Competition Large number of buyers and sellers Large number of buyers and sellers No product differentiation No product differentiation Low barriers to entry and exit Low barriers to entry and exit Perfect and equal information Perfect and equal information No price restrictions & no collusion No price restrictions & no collusion

3. Market Individual S D d s=MC Farmer’s as price takers

4. Consequences of Perfect Competition Individuals are price takers Individuals are price takers profits by costs profits by costs Cost - price squeeze Cost - price squeeze Don’t perceive horizontal competition Don’t perceive horizontal competition Marketing decisions are Marketing decisions are –Time, place, and form

5. Monopoly One seller One seller Price setter Price setter –Firm supply is the market supply Examples Examples –Utilities, cable TV –Often regulated

6. Monosony One buyer One buyer Price setter Price setter –Firm demand in market demand Depend on market definition Depend on market definition –Time, form, place

7. Monopoly / Monosony Success depends on Success depends on –Barriers to entry –Closeness of substitutes Regional markets ???? Regional markets ????

8. Oligopoly / Oligopsony Few sellers or buyers Few sellers or buyers Individuals can influence price Individuals can influence price –Co-exist with rivals –More stable prices Optimal output is less than profit max output for any one firm Optimal output is less than profit max output for any one firm

9. Oligopoly / Oligopsony Often price leader/follower Often price leader/follower Emphasis on non-price comp. Emphasis on non-price comp. Examples Examples –Autos, farm equipment, cereals

10. Oligopoly / Oligopsony Incentive to try cartels Incentive to try cartels –Work together to set supply or price Some government sponsored Some government sponsored –OPEC –Marketing Boards –Illegal in US

11. Monopolistic Competition Between oligopoly and perfect comp. Between oligopoly and perfect comp. Relatively few firms Relatively few firms Many close substitutes Many close substitutes Try to differentiate product Try to differentiate product

12. Monopolistic Competition Very elastic demand Very elastic demand Prices nearly alike as consumers will switch Prices nearly alike as consumers will switch Emphasis on non price comp. Emphasis on non price comp. –Pricing strategy –Carcass merit, value based marketing

13. Structure and performance Perfect competition will produce output and aggregate price with the greatest operational efficiency Perfect competition will produce output and aggregate price with the greatest operational efficiency Monopoly has the lowest operational efficiency Monopoly has the lowest operational efficiency

14. Structure and performance Oligopoly & Monopoly Competition Oligopoly & Monopoly Competition –In between perfect and monopoly –Often lead to:  Excess capacity  Excess non-price competition

15. Competitive Conditions Farm markets are near perfect competition but changing Farm markets are near perfect competition but changing –Product differentiation –Branded products –Advertising –Promotion

16. Market Concentration Percent of sales by largest firms Percent of sales by largest firms 4 firm concentration ratio CR4 4 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 Ag All types in Ag

17. CR4 in Ag Cattle slaughter67 Cattle slaughter67 Steer and heifer slaughter80 Steer and heifer slaughter80 Hog slaughter56 Hog slaughter56 Soybean mills71 Soybean mills71 Fluid milk 22 Fluid milk 22 Poultry processing34 Poultry processing34 Breakfast cereal85 Breakfast cereal85

18. Leaders Beef Beef –IBP/Tyson, Excel/Cargill, Swift/Conagra, Farmland, Smithfield Pork Pork –Smithfield, IBP/Tyson, Excel/Cargill, Hormel

19. Leaders Grain Handling Grain Handling –ADM, Cargill, Bunge, Cenex Harvest States, Peavey/Conagra Ag Chemicals Ag Chemicals –Bayer CropScience (Aventis), Syngenta, Monsanto, BASF, Dow Agrosciences Seeds Seeds –DuPont (Pioneer), Monsanto, Syngenta, Groupe Limagrain, Grupo Pulsar

20. Concentration and Market Definition Iowa steer and heifer slaughter Iowa steer and heifer slaughter US steer and heifer slaughter US steer and heifer slaughter US cattle slaughter US cattle slaughter All livestock slaughter All livestock slaughter All protein production All protein production

21. Barriers to Entry Key resources Key resources –Inputs, $$$, skills –Patent Economies of scale Economies of scale Location Location Information Information

22. Workable Competition Enough buyers and sellers to provide alternatives Enough buyers and sellers to provide alternatives No one can coerce a rival No one can coerce a rival Firms respond to profit and loss Firms respond to profit and loss

23. Workable Competition No collusion No collusion Enough entry and exit for rivals to challenge Enough entry and exit for rivals to challenge Free access of buyers and sellers Free access of buyers and sellers

24. Role of Government Prevent or regulate monopoly Prevent or regulate monopoly Anti-trust laws to prevent some types of behavior Anti-trust laws to prevent some types of behavior Coop laws to strengthen smaller firms by banning together Coop laws to strengthen smaller firms by banning together

25. Government Regulations Grain Inspection, Packers and Stockyards Administration (GIPSA) Grain Inspection, Packers and Stockyards Administration (GIPSA) –Division of USDA –Regulation of markets and trade http://www.usda.gov/gipsa/ Federal Trade Commission Federal Trade Commission –Anti-Trust investigations Attorney General (State) Attorney General (State)

26. Mini Case 9 The Judge’s Dilimma page 176

27. Concentration summary More narrowly defined markets are more concentrated More narrowly defined markets are more concentrated Integration is not concentration Integration is not concentration Economies of scale Economies of scale –Plant or firm level economies –May drive concentration

28. Study Questions Evaluate the following: “We wouldn’t need competition in food markets if businessmen were honest.” Evaluate the following: “We wouldn’t need competition in food markets if businessmen were honest.” Would farmers prefer perfect competition or imperfect competition? Would farmers prefer perfect competition or imperfect competition? What can farmers do to make their markets less perfectly competitive? What can farmers do to make their markets less perfectly competitive?