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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.

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Perfect Competition

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Perfect competition l.jpg

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


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Farmer’s as price takers

s=MC

S

d

D

Market

Individual


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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


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Monopoly

  • One seller

  • Price setter

    • Firm supply is the market supply

  • Examples

    • Utilities, cable TV

    • Often regulated


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Monopoly Supply and Demand

P

S

PM

MR=MC

PC

D

QM

MR

Q


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Monosony

  • One buyer

  • Price setter

    • Firm demand in market demand

  • Depend on market definition

    • Time, form, place


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Monopoly / Monosony

  • Success depends on

    • Barriers to entry

    • Closeness of substitutes

  • Regional markets ????


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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


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Oligopoly / Oligopsony

  • Often price leader/follower

  • Emphasis on non-price comp.

  • Examples

    • Autos, farm equipment, cereals


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Oligopoly / Oligopsony

  • Incentive to try cartels

    • Work together to set supply or price

  • Some government sponsored

    • OPEC

    • Marketing Boards

    • Illegal in US


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Monopolistic Competition

  • Between olig and perfect comp.

  • Relatively few firms

  • Many close substitutes

  • Try to differentiate product


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Monopolistic Competition

  • Very elastic demand

  • Prices nearly alike as consumers will switch

  • Emphasis on non price comp.

    • Pricing strategy

    • Carcass merit, value based marketing


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Structure and performance

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

  • Monopoly has the lowest operational efficiency


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Structure and performance

  • Olig & Mono Comp

    • In between perfect and monopoly

    • Often lead to:

      • Excess capacity

      • Excess non-price competition


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Competitive Conditions

  • Farm markets are near perfect competition but changing

    • Product differentiation

    • Branded products

    • Advertising

    • Promotion


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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


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CR4 in Ag

  • Cattle slaughter67

  • Steer and heifer slaughter80

  • Hog slaughter56

  • Soybean mills71

  • Fluid milk 22

  • Poultry processing34

  • Breakfast cereal85


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Leaders

  • Beef

    • IBP/Tyson, Excel/Cargill, Swift/Conagra, Farmland, Smithfield

  • Pork

    • Smithfield, IBP/Tyson, Excel/Cargill, Hormel


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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


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Concentration and Market Definition

  • Iowa steer and heifer slaughter

  • US steer and heifer slaughter

  • US cattle slaughter

  • All livestock slaughter

  • All protein production


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Barriers to Entry

  • Key resources

    • Inputs, $$$, skills

    • Patent

  • Economies of scale

  • Location

  • Information


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Workable Competition

  • Enough buyers and sellers to provide alternatives

  • No one can coerce a rival

  • Firms respond to profit and loss


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Workable Competition

  • No collusion

  • Enough entry and exit for rivals to challenge

  • Free access of buyers and sellers


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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


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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)


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Concentration summary

  • More narrowly defined markets are more concentrated

  • Integration is not concentration

  • Economies of scale

    • Plant or firm level economies

    • May drive concentration


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