Using Elasticities

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Perfect Competition
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


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


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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


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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
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