Nov11 -- Structure, Conduct, and Performance Model

Nov11 -- Structure, Conduct, and Performance Model -...

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    Market Structure, Conduct, and  Performance Model (11/11/10) AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles Market Structure # of Buyers and Sellers Product Similarity Ease of Entry/Exit Info Available Market Conduct Price Decisions Non Price Decisions advertising/promotion) Quantity Decisions Market Performance Pricing Efficiency Operational Efficiency Profits/Distribution Consumer Preferences Information Government Oversight/Regulation
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    Market Structure, Concentration,  and Market Power Economists evaluate the degree of “concentration” in  analyzing market structure and assessing its impact on  market conduct and performance  What is concentration?  a measure of the relative size (and thus market power) of an  industry’s largest firms What is market power?  a firm is said to possess market power if it is able to raise  (lower) it’s price as a seller (as a buyer) above (below)  competitive levels – characteristic of firms who can restrict  entry and possess a high degree of concentration
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    Concentration Ratios To evaluate the degree of concentration,  economists calculate the percentage of  market share possessed by the largest  firms. For example, a “ CR 4     represents the  percentage of industry sales (or  purchases) made by its four largest firms.  What does a CR measure? AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles
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    Concentration Ratios high concentration ratio  indicates a  large  degree of market concentration  and raises  concerns over  firms abusing their market power   (charging higher prices to consumers or offering  lower prices to producers relative to a more  competitively determined price, limiting entry,  constraining the degree of market information,  constraining output, while a  low concentration  ratio  indicates that firms have  limited market  power   AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles
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    Concentration “A CR 4   greater than 50% is customarily regarded as  evidence of a concentrated industry – one to which an  oligopolistic (or oligopsonist) model best applies. Currently more than one-half of the food processing  industries have a CR 4  over 50%” Sometimes an individual firm is both an oligopsonist  (among a few buyers of a farm product) and an  oligopolist (among a few sellers of a consumer product) AEC 305, Food and Agricultural Marketing Principles AEC 305, Food and Agricultural Marketing Principles
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Nov11 -- Structure, Conduct, and Performance Model -...

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