Food Marketing Competition

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Food Marketing Competition

• AGBU430
• Chapter 9

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Why Is Competition So Important?

• It Decentralizes Power
• Freedom of Opportunity
• Limited Government
• Progressive, Flexible
• Provides Consumer Sovereignty
• Efficient

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Two Views of Competition
The Economist The Business
Person Prefers
Prefers
Price Competition Non-Price
Competition
Price Takers Price Makers
Standardized Products Differentiated Products
Free Entry Blocked Entry
Large Numbers Small Numbers
Rational Advertising Emotional Appeals
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Types of Competition

• Product Beef vs. Pork
• Brand Coke vs. Pepsi
• Interregional Calif. vs. Florida oranges
• International U.S. vs. Japanese cars
• Institutional Grocery vs. Fast Food
• Functional Rail vs. Truck
• Vertical Processors vs. Retailers
• Horizontal Brookshires vs. Albertsons

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Firm Competition
Perfect Competition
(Most firms are here)
Monopoly
Monopolistic Competition
Oligopoly
Differ By
Numbers, Sizes of Firms Product
Differentiation Conditions of Entry Profit
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Characteristics Perfect Monop. Oligopoly
Monopoly Comp. Comp.
Sellers large many
few one
Prod. Diff. none high
some high
Entry easy possible
difficult blocked
Price Influence none limited
greater high
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Conditions For Perfect Competition

• Large Numbers of Small Firms
• Product Homogeneity
• Free Entry and Exit
• No influence on price
• Equal information
• Found In Some Agricultural Markets

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Consequences of Perfect Competition

• Horizontal demand curve
• Price takers
• Major marketing decision is how much to product
  and how to market
• Incentive to lower costs and improve operational
  efficiency
• Cost-price squeeze
• Independent decision makers
• No advertising

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Escape From Perfect Competition???

• Reduce Numbers of Sellers (trend)
• Restrict Output (requires government)
• Restrict Entry Into Farming (zoning??)
• Sell As a Unit (cooperatives)
• Assume More Marketing Functions (add value)
• Brand, Promote Products (group effort)
• Fix Prices (requires government)

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Supply and Demand Perfect Competition
S
S
P
P
Po
d
Po
Downward sloping demand curve
Perfectly elastic demand curve
D
Q
Q
All Corn Farmers (billion bushels)
Each PC Farmer (few thousand bushels)
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Monopolies

• Monopoly one seller
• Monopsony one buyer
• Indiv. D curve is Market D curve
• Do not have complete price freedom

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Sources of Monopolies

• Sole source of raw material
• Patent
• Economies of scale
• Government action

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Oligopoly

• Oligopoly few sellers
• Oligopsony few buyers
• Market concentration so great, leading firms can
  influence price
• Develop hierarchy of leaders
• Rivalry non-price (prod. differentation,
  advertising)
• interdependence of firms - policies of one firm
  affect the other firms
• substantial barriers to entry
• examples auto industry and cigarette industry

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Cartels and Oligopoly

• Cartel A group of firms or nations who conspire
  to fix prices and raise profits
• Coffee, Oil, Cocoa, Diamonds
• Requires
• Supply Control
• Blocked Entry
• Market Sharing Agreements
• Illegal in U.S.

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Oligopoly

• While it pays for firms to collude, in order to
  earn positive profits, it also pays to cheat on
  the collusive agreement. If one firm cuts its
  price to slightly below the others, it could gain
  a lot of business.
• If everyone cheats on the agreement, however, the
  agreement falls apart.

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Kinked Demand Curve

• Assumptions
• If a firm raises prices, other firms wont follow
  and the firm loses a lot of business.
• So demand is very responsive or elastic to price
  increases.
• If a firm lowers prices, other firms follow and
  the firm doesnt gain much business.
• So demand is fairly unresponsive or inelastic to
  price decreases.

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Oligopoly Demand Curve
P
Oligopoly (kinked)
Q
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Monopolistic Competition

• Many Sellers
• Differentiated Products (brands, quality,
  services, location, etc.)
• Relatively Easy Entry (but high capital costs)
• Elastic Demand Curves (numerous substitutes)
• Some Influence On Price (brand loyalty)
• Marketing strategies include differentiation,
  packaging, branding, credit, service . . .

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Examples Monopolistic Competitors

• McDonalds vs. Burger King
• Coke vs. Pepsi
• Green Giant vs. Del Monte
• Coop vs. Independent farm store

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Competition and Firm Demand Curves
Oligopoly (kinked)
P
Perfect Competition
Monopolistic Competition
Monopoly
Q
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Four-Firm Concentration Ratio
Percentage of total industry sales accounted
for by the four largest firms of an industry.
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Hertz
Avis
Ex The four largest firms in the car rental
industry account for 94 of all car rentals in
the U.S. So, the four-firm concentration ratio
for the car rental industry is 94.
National
Budget
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4-Firm Concentration Ratios, by Industries
Percent of Total Shipments By Top 4 Firms
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Numbers of Food Marketing Mergers
Foodservice
Retailers
Wholesalers
Processors
Source Economic Research Service, U.S.
Department of Agriculture.
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Horizontal Merger
Combination under one ownership of the assets
of two or more firms engaged in the production
of similar products Ex two steel manufacturing
companies merging
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Vertical Merger
Creation of a single firm from two firms, one
of which was a supplier of the other Ex a
lumber company and a builder merging
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Conglomerate Merger
Combining under one ownership of two or more
firms that produce unrelated products Ex tire
manufacturer and a coffee company merging
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Sources of Imperfect Competition In the Food
Industries

• Product Differentiation (branding, quality,
  service, etc.)
• Customer Loyalty, Ignorance
• Location
• 4P Marketing Strategies
• Costs, Efficiency, Prices
• Technology

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Consequences of ImperfectCompetition

• Compared to Perfect Competition
• Output is Lower
• Prices are Higher
• Profits are Higher
• Efficiency is Lower
• However,
• Some Firm Profits are Higher
• Products are Differentiated
• Markets are More Interesting!

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The Competitive Paradox

• Perfectly Competitive Markets Give Us
• Efficient Use of Resources
• Small Firms
• Imperfectly Competitive Markets Give Us
• Differentiated Products, Variety
• Profits, Dividends, Jobs
• Advertising and Entertainment
• Corporate Philanthropy

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Is There Price Competition In the Food Industry???

• Forms of Price Competition
• Sales, Discounts, 2-for-1
• Loss Leaders
• Rebates, Coupons
• Forms of Non-Price Competition
• Branding, Advertising
• Customer Services
• Packaging
• Product Innovation