Using Elasticities
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Transcript Using Elasticities
Perfect Competition
Large number of buyers and sellers
No product differentiation
Low barriers to entry and exit
Perfect and equal information
No price restrictions & no collusion
Farmer’s as price takers
s=MC
S
d
D
Market
Individual
Consequences of Perfect
Competition
Individuals are price takers
profits by
costs
Cost - price squeeze
Don’t perceive horizontal competition
Marketing decisions are
» Time, place, and form
Monopoly
One seller
Price setter
» Firm supply is the market supply
Examples
» Utilities, cable TV
» Often regulated
Monopoly Supply and Demand
P
S
PM
MR=MC
PC
D
QM
MR
Q
Monosony
One buyer
Price setter
» Firm demand in market demand
Depend on market definition
» Time, form, place
Monopoly / Monosony
Success depends on
» Barriers to entry
» Closeness of substitutes
Regional markets ????
Oligopoly / Oligopsony
Few sellers or buyers
Individuals can influence price
» Co-exist with rivals
» More stable prices
Optimal output is less than profit
max output for any one firm
Oligopoly / Oligopsony
Often price leader/follower
Emphasis on non-price comp.
Examples
» Autos, farm equipment, cereals
Oligopoly / Oligopsony
Incentive to try cartels
» Work together to set supply or price
Some government sponsored
» OPEC
» Marketing Boards
» Illegal in US
Monopolistic Competition
Between olig and perfect comp.
Relatively few firms
Many close substitutes
Try to differentiate product
Monopolistic Competition
Very elastic demand
Prices nearly alike as
consumers will switch
Emphasis on non price comp.
» Pricing strategy
» Carcass merit, value based marketing
Structure and performance
Perfect competition will
produce output and aggregate
price with the greatest
operational efficiency
Monopoly has the lowest
operational efficiency
Structure and performance
Olig & Mono Comp
» In between perfect and monopoly
» Often lead to:
–Excess capacity
–Excess non-price competition
Competitive Conditions
Farm markets are near perfect
competition but changing
» Product differentiation
» Branded products
» Advertising
» Promotion
Market Concentration
Percent of sales by largest firms
4 firm concentration ratio CR4
» Strong olig CR4 > 50%
» Weak olig CR4 33-50%
» Unconcentrated CR4 < 33
Competition
as concentration
All types in Ag
CR4 in Ag
Cattle slaughter
Steer and heifer slaughter
Hog slaughter
Soybean mills
Fluid milk
Poultry processing
Breakfast cereal
67
80
56
71
22
34
85
Leaders
Beef
» IBP/Tyson, Excel/Cargill,
Swift/Conagra, Farmland, Smithfield
Pork
» Smithfield, IBP/Tyson, Excel/Cargill,
Hormel
Leaders
Grain Handling
» ADM, Cargill, Bunge, Cenex Harvest States,
Peavey/Conagra
Ag Chemicals
» Bayer CropScience (Aventis), Syngenta,
Monsanto, BASF, Dow Agrosciences
Seeds
» DuPont (Pioneer), Monsanto, Syngenta,
Groupe Limagrain, Grupo Pulsar
Concentration and Market
Definition
Iowa steer and heifer slaughter
US steer and heifer slaughter
US cattle slaughter
All livestock slaughter
All protein production
Barriers to Entry
Key resources
» Inputs, $$$, skills
» Patent
Economies of scale
Location
Information
Workable Competition
Enough buyers and sellers to
provide alternatives
No one can coerce a rival
Firms respond to profit and loss
Workable Competition
No collusion
Enough entry and exit for rivals
to challenge
Free access of buyers and sellers
Role of Government
Prevent or regulate monopoly
Anti-trust laws to prevent
some types of behavior
Coop laws to strengthen
smaller firms by banning
together
Government Regulations
Grain Inspection, Packers and
Stockyards Administration (GIPSA)
» Division of USDA
» Regulation of markets and trade
» http://www.usda.gov/gipsa/aboutus/bkgd2.htm
Federal Trade Commission
» Anti-Trust investigations
Attorney General (State)
Concentration summary
More narrowly defined markets
are more concentrated
Integration is not concentration
Economies of scale
» Plant or firm level economies
» May drive concentration