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1.4. How Markets Work
Session-at-a-glance
Content
Approximate
Time
Instructional Activity
Plenary presentation and Q&A
(includes time for “quick case”)
Elements of Market Functioning
45minutes
Option: Exercise 1.4.b. Market
Environment in Malawi
20 minutes Small Group Work
Exercise Debriefing
25 minutes Plenary discussion
Total Time
90 minutes
Session Objectives
After this session, participants should be able to:

Explain the differences between market structure, conduct and performance

Explain the relevance of structure, conduct and performance for market functioning and
food security assessment
Session Supplies

Power-point: 1.4. How Markets Work.ppt

Workbook Exercise 1.4. Market Environment in Malawi (annexed to this Session Guide
as Annex 1)
Key Messages

The analysis of market structure, conduct and performance (SCP) helps anticipate market
response, define relevant scenarios, and formulate expectations about the season – all to
understand more fully food security conditions.

Analysis of SCP also can provide decision makers with the information needed to make
better response decisions. This can help orient timing of humanitarian interventions,
complementing & compensating for markets rather than replacing them.

Market structure refers to the relatively stable features of a market that influence rivalry
of buyers and sellers.
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
Market conduct refers to the patterns of behaviour that traders follow to affect or adjust to
changing market conditions.

Market performance refers to the extent to which markets can produce outcomes deemed
good or preferred by society, that is, regular, predictable availability of basic foods at
affordable prices for consumers.
Facilitator Guidance and session preparation
Facilitators should learn the basics of how trade policies impact markets, and how market
structure, conduct and performance function in the country of the workshop. This knowledge
will prove helpful in debriefing the various exercises and plenary questions.
Room Setup
Arrange for small group work in the plenary conference room.
Session Activities
Elements of Market Functioning
45 minutes
Show PPTs 1-2 to present session topic and objectives. Show PPT 3 to quickly review three key
elements of market elements (that most people have heard of and understand); show the fourth
point and note that market environment and functioning – and SCP in particular – are also key
elements that enable the analyst to anticipate the impact of trader decisions and actions on the
market – and consequently on household food access.
Show PPT 4 and note the particular importance and aims of analyzing SCP. Review the side bar
and stress that learning about trader behaviour – particularly in a crisis is a key part forecasting
the evolution of household food access.
Show PPTs 5 and 6 to highlight the various economic, political and regulatory factors external to
the market that can profoundly impact market conditions. Review the points quickly and then
move to the Quick Case (Exercise 1.4.a) that provides a “real-life” example of market
environmental factors that have a deep impact on food security in Egypt. Show PPT 7 and ask
participants to read the case quickly and then, with a partner, discuss their responses to the two
questions:
Question
1. What are the main
thrusts of the GoE’s
Possible Responses
 Provision of subsidies for basic foods (bread, wheat
flour, cooking oil, sugar)
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food security policy?
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



2. What are the main
challenges confronting
the GoE in liberalising
its food security
policies?



In the future (not now), better targeting of subsidies,
cost reduction
Decreasing agricultural production costs
Expansion of areas cultivated
Liberalization of markets, pricing and trade; encourage
comparative advantage in domestic and international
markets, remove subsidies
Lack of market and price stability
Lack of crop diversification
Reforms are not yet high-priority
(While the answers are clearly provided in the short text, the exercise offers an opportunity to
participants to apply the concepts of market environment that you have just presented.) Give
them about five minutes, and then call on volunteers to offer their responses. Ensure that each
pair of participants has actually discussed the case before responding: the aim is to discuss, not
just “get it right.”
After this brief discussion, show PPT 8 and turn the discussion to the market environment in the
country of the workshop; ask them, “How do trade policies impact markets in this country?”
Take a few responses and fill in the gaps to the best of your capacity.
Now tell them you will review the three elements of market functioning – SCP.
Show PPT 9 and review the points on market structure, emphasizing that trading relations –
themselves a function of countless factors – play a large role in determining how well the market
will function in time of crisis (i.e. whether or not food is likely to move to a deficit area.) Use
PPT 10 as an example.
Show PPT 11 as an example of highly developed trading patterns.
Show PPTs 12and 13 to present the concept of the market chain – a group of people or
organizations that direct the flow of commodities from production to consumers, and stress the
importance of analysing the chain to understand what possible ruptures could take place in time
of crisis.
With PPT 14, ask the participants to reflect on the market chain in the workshop country, and
what possible ruptures could result from a major shock? Take a few responses, but keep it
moving.
Show PPT 15 and note the second key element of market functioning: market conduct. This
element is closely linked to market structure, and refers to the various patterns of behaviour that
traders follow to affect or adjust to changing market conditions. Understanding these patterns is
key to understanding how traders are likely to act if a shock limits production or consumption.
Note that, if there are high barriers to entry, there will be a few firms and traders who can
profitably engage in market activities. These few traders could engage in non-competitive
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behaviour (price-setting) such as predatory price setting behaviour. Such high concentration can
result in high profits and high marketing margins for traders, but also produce low producer
shares for farming households (where producer share is the price received by farmer over the
price paid by the end consumer for a commodity expressed in comparable units). Market conduct
can have significant impact on household food security through purchasing power (livelihoods
analysis).
Show PPT 16 as one example of market conduct – on which many actors take a fee for service in
the channelling of the food from production to consumer.
Use PPT 17 to solicit participant perspectives on market conduct in the workshop country: i.e.,
the extent of market competition or concentration.
Show PPT 18 and introduce the key element of “market performance” which is directly impacted
by market structure and conduct. Market performance is basically the extent to which markets
produce outcomes deemed by society to be good or preferable: a well-performing market is
characterized by the regular and predictable availability of basic foods at affordable prices for
most consumers. Note that this is of course a subjective judgment: when is a price considered
fair? Fair to whom? In a crisis, if a trader charges a price higher than the cost of a given quantity
of a commodity, can one say that the market is performing well? If the consumer then pays the
higher price can one say the market is performing poorly? These are subjective arguments that
require good knowledge of both pre-crisis and post-crisis conditions.
Show PPT 19 to provide an example of markets whose prices appear to move closely in tandem
– implying “well-integrated” markets. Note that this topic will be focused upon more closely
later in the week.
Use PPT 20 to solicit participant perspectives on market performance in the workshop country:
i.e., the degree of stability or fluctuation with regard to prices.
Show PPT 21 to sum up the reason for analyzing SCP: it helps us to anticipate whether or not
food will move from where it is produced to where and when it is needed.
Finally, show PPT 22 to indicate how the interpretation of SCP and market functioning serves
WFP aims: it helps us anticipate the market response to shocks, to formulate expectations about
the season, and clarifies the implications for possible cash or voucher programming.
Option: Exercise 1.4.b. Market Environment in Malawi
If time permits, have the participants conduct this exercise. If additional time has been taken up
for answering participant questions on concepts, this can be omitted. This assumes that the
Quick Case “Markets & Food Security Policy in Egypt” has been conducted.
20 minutes
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Show PPT 23 and have participants turn to Workbook Exercise 1.4. The exercise should be
carried out in groups of four (+/- depending upon the workshop size). Tell them they will have
20 minutes to read the case and, as a group, discuss the two questions, and prepare brief
presentations to plenary of their findings.
The questions to answer include:
1. How would they characterize the market environment in Northern Province?
2. What are the likely implications for market functioning and for household food security
in Northern Province
As they work, move around the tables and offer guidance as necessary.
Option: Exercise Debriefing
25 minutes
Ask the first group to offer one idea with regard to question 1. Ask the second group to offer
another (not repeat!), the third group to offer another, etc. Continue until they have exhausted
their findings. Repeat the same process with question 2.
Their answers should get at the following points:
Question
Possible Responses
1. How would they
Poor market environment:
characterize the
 remoteness discourages traders from south; transaction costs
market environment
are very high
in Northern Province?  Need for much official authorization to trade – acts as barrier
to entry; high and irregular customs duties; weak border
controls with bribery rampant
 Non-tariff barriers to trade; central gov’t laws requiring import
plans – results in poor market responsiveness,

2. What are the likely
 Market functioning is poor, unable to meet deficits imposed
implications
for
by crisis
market
functioning
 Market structure is likely controlled by a few for their own
and for household
benefit
food
security
in
 HH food insecurity is likely much increased because of
Northern Province
poorly performing markets
Finally, use “1.5. Day 1 Summary.pptx” to summarize the day’s main learning points.
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Annex 1
Exercise 1.4.b. Market Environment in Malawi
Malawi has achieved considerable surplus production in recent years due to an ambitious agriculture agenda by the
Government that has generated significant commodity surpluses and enabled local food procurement by aid
agencies. The country’s agricultural policy has in recent years been liberalized, with a decreasing role for the
Agricultural Development and Marketing Corporation (ADMARC) in the marketing of maize. ADMARC is widely
viewed as a bloated, ineffective bureaucratic structure with ongoing cash flow problems.
Two significant GoM policies remain in effect and are the cornerstones of the national food security agenda.
Minimum farm gate prices for strategic crops: The Ministry of Agriculture and Food Security (MoAFS) has for
the past two seasons instituted minimum farm gate prices on all strategic crops, including maize, pulses,
groundnuts, rice, and cotton.
Farm Input Subsidy Programme (FISP): Access to inputs is a limiting factor for many farmers across Malawi. In
response, MoAFS has built upon earlier input subsidy programmes and rolled out an ambitious national support
system for smallholders. The input subsidy program was identified as a facilitating factor in surplus production
last season.
Structure
Buying and selling of maize by smallholders happens primarily through small-scale traders who generally trade up
to 50 MT at a time. Mid-scale traders employ multiple agents to buy commodities on their behalf, typically move
volumes in the 500 to 2000 MT range, and are much less constrained by storage and capital than small-scale traders,
but without the market dominance of large-scale traders. Mid-scale traders are generally crucial in moving maize
into food-deficit areas during the lean season. Large traders have fewer storage and capital constraints than their
mid-scale suppliers, and generally dominate the marketing of food commodities. Their operations are national, and
include responding to contracts for NFRA and humanitarian organizations, and for export.
Conduct
A common accusation by consumers, aimed at both vendors and ADMARC, is a lack of price transparency: scales
used to buy and sell commodities are said to be fixed so as to under-report weight when buying, and over-report
weight when selling. Because prices can be manipulated and consumer capacity to hold traders accountable is
lacking, there is little incentive for smallholders to produce and differentiate high quality from low quality maize. In
some markets, small vendors and traders collude to buy and sell at fixed prices. This price-setting tends to occur
more often in places where vendors are local and physically clustered at one specific location in the market, i.e.
where cartel-like behaviour is possible. In Central region markets, where there is heavy trading activity by a wide
range of traders from arriving from different towns, small traders are less collusive and more competitive.
Performance
Prices in Malawi in general are highly unstable, both within seasons (reflecting a high degree of seasonality) and
between years (real prices in a given market, for a given month, show high degrees of variability). Many markets
exhibit the highest levels of price instability in the months of July-September following the harvest, which
corresponds with the peak of trader activity, making price negotiation of forward contracts with farmer organisations
problematic.
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Task: Read the case and, as a group, discuss:
3.
How would you characterize the market environment in Malawi?
4.
What are the likely implications for market functioning and for household food security in Malawi?
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