& Market Bargaining Power
Chapter 15 Market power is like the wind. You can feel it but you cannot see it.
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Objectives
1. What are the types of market & bargaining power in the food industry? 2. What are the sources & impacts of market power? 3. How do public policy tools attempt to increase farmers market power?
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Lack of Power
What do we complain about? Processors Retailers Consumers Farmers
Market Power
The ability to advantageously influence markets, market behavior, or market results.
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Price Demand Product flows Quality Marketing functions Market behavior
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Bargaining Power
The relative strength of buyers & sellers in influencing the terms of exchange in a transaction.
Requires market power Between buyers & sellers
Market Power Problems
Unequal distribution
Take advantage of large influence
Ways to solve market power problems:
1. Reduce the influence of the powerful 2. Increase the influence of the weak
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Market Power & Market Competition
Imperfectly competitive firms
Have power. Why?
Types of Market Power
1. Horizontal power
Influence of similar firms
2. Vertical power
Influence of vertically related firms in the market channel
Perfectly competitive firms
Have no power. Why?
3. Conglomerate market power
Influence of firms because of its ties to nonfood companies
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Types of Bargaining Power
Opponentpain
Ability of buyer or seller to threaten or make opponents worse off.
Thats my price, take it or leave it Sell to me or keep it Give us our terms or well dump the product
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Types of Bargaining Power
Opponentgain
Advantages that one party can offer to the other in exchange for acceptable terms.
Quality control Full-supply contracts Delivery services Improved scheduling of production
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Types of Bargaining Power
Gain from thirdparty
Buyer & seller agree to secure a gain from a third party. Higher prices, government subsidies, protection from imports
Consumers Other marketing agencies Farmers Government
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Sources of Market Power
1. Size, number, & market concentration of firms.
Large firms or small firms Number of alternatives for weaker market party Farmers organization is more important than numbers & sizes
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Sources of Market Power
2. Supply control
Most important source of market power Inferior market power because of: No production or supply control Perishable products Lack of storage space
Sources of Market Power
3. Unequal information
Information is power
4. Diversification
More flexible in marketing decisions Reduces market risk Products Geography Marketing functions
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Sources of Market Power
5. Product differentiation
More control over product demand
Sources of Market Power
7. Financial resources
Withstand competitive battles Inflict greater opponentpain power Conglomerate food company
6. Control of strategic resources & decisions
Gate keepers Brands Consumer loyalty Retail shelf space Retail prices
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8. Ratio of fixedtovariable costs
Firms with relatively high fixed costs Suffer from excess capacity Slow response to price change Inflexible
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Market Power in the Food Industry
Compared with food marketing firms farmers have inferior marketing & bargaining power. Why?
Farm numbers Farm sizes Low levels of organization High fixed costs Geographic & product specialization Homogeneous products
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Market Power in the Food Industry
Why do food retailers have marketing & bargaining power?
Size Control of private labels & shelf space Direct contact with consumers Geographic & product diversity
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Market Power in the Food Industry
Why do food processors have marketing & bargaining power?
Size Brand loyalty Diversified product lines Investment in new product development Conglomerate affiliations
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Power Tools
Marketing Agreements Marketing Orders Cooperatives Bargaining Associations
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Marketing Orders & Agreements
Agricultural Adjustment Act, 1933 Agricultural Marketing Agreement Act, 1937
Authorized farmers to engage in collective marketing activities.
Marketing Agreements
Voluntary arrangements between:
Producers Handlers of farm products Secretary of Agriculture
Goals:
More orderly marketing Increase level & stability of farmer returns
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Most break down
Enforced by a marketing order
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Marketing Orders
Established by a majority vote of producers.
Handlers or buyers dont have to approve. Legally binding on all producers & handlers.
Establishing a Marketing Order
Must be approved by:
Two-thirds of producers Two-thirds of production
Authorized for:
Milk, fresh fruits & vegetables, tobacco, peanuts, turkeys, apples for processing
Prohibited for:
Foodgrains, feedgrains, soybeans, livestock, poultry, eggs
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Separate orders for each commodity Usually limited geographic area Often work with marketing cooperatives
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Marketing Provisions
1. Order To classify milk according to its use, set minimum producer prices, and to average (pool) returns to milk producers. 2. To manage the flow of commodities to market either in total or by grade, size, or timing. 3. To establish producer or handler marketing allotments. 4. To control and equalize the burden of surplus production. 5. To regulate the size, capacity, weight, and other dimensions of pack or containers.
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Marketing Order Provisions
6. To set up market information, product inspection and standardization, and market research and development programs. 7. To establish systems for pooling or averaging returns to producers and handlers for different time, form, and spatial markets. 8. To prohibit unfair trading practices. 9. To engage in commodity advertising programs. 10. To regulate the grade, size, quality, and maturity of imported commodities.
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Orders as Monopolistic Devices
Supply control
Restrictions on quality, size, imports Advertising programs
Price Discrimination
Restrict supplies in inelastic demand markets.
When price ____, TR ____
Product flow control
Time, form, and place markets Manage the flow of supplies into these markets Different prices may be established
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Increase supplies in more elastic markets
When price ____, TR ____
Marketing orders allow producers to do what others are doing in the food industry.
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Successful Price Discrimination
1. More than one market. Each with different elasticity of demand 2. There must be a system to control the allocation of total supplies to each market. Marketing order 3. Buyers must be persuaded to pay different prices for the product and must be prevented from purchasing in the lowest-priced market. Marketing order advertising, grading, sorting, control of flows
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Successful Market Orders
1. More orderly marketing, greater farm returns. 2. Modest increase in farm prices in the long run. 3. Transfer of some market power & decision making from marketing firms to producers. 4. Increase in farm product differentiation and farmer-controlled advertising. 5. Generate market information and research.
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Market Order Limitations
Dont solve all farm market power & price problems. Not permitted for all products
Best for specialty crops & concentrated areas Least successful for commodities with lots of producers in scattered areas
Market Order Limitations
Most important limitation
Lack of control over production Helps improve farm prices & incomes Encourages entry & supply expansion
Influence but dont determine prices Coercion of majority over minority Free riders
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Farm product buyers lose a little market freedom. Price discrimination Price & supply stability for consumers
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The Need for Market Orders Today
Specialty ag products Increasing sizes of production units Grower integration into marketing Much larger buyers Production-to-specificat...