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Perfect Competition

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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  1. 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

  2. Farmer’s as price takers s=MC S d D Market Individual

  3. 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

  4. Monopoly • One seller • Price setter • Firm supply is the market supply • Examples • Utilities, cable TV • Often regulated

  5. Monopoly Supply and Demand P S PM MR=MC PC D QM MR Q

  6. Monosony • One buyer • Price setter • Firm demand in market demand • Depend on market definition • Time, form, place

  7. Monopoly / Monosony • Success depends on • Barriers to entry • Closeness of substitutes • Regional markets ????

  8. 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

  9. Oligopoly / Oligopsony • Often price leader/follower • Emphasis on non-price comp. • Examples • Autos, farm equipment, cereals

  10. Oligopoly / Oligopsony • Incentive to try cartels • Work together to set supply or price • Some government sponsored • OPEC • Marketing Boards • Illegal in US

  11. Monopolistic Competition • Between olig and perfect comp. • Relatively few firms • Many close substitutes • Try to differentiate product

  12. Monopolistic Competition • Very elastic demand • Prices nearly alike as consumers will switch • Emphasis on non price comp. • Pricing strategy • Carcass merit, value based marketing

  13. Structure and performance • Perfect competition will produce output and aggregate price with the greatest operational efficiency • Monopoly has the lowest operational efficiency

  14. Structure and performance • Olig & Mono Comp • In between perfect and monopoly • Often lead to: • Excess capacity • Excess non-price competition

  15. Competitive Conditions • Farm markets are near perfect competition but changing • Product differentiation • Branded products • Advertising • Promotion

  16. 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

  17. CR4 in Ag • Cattle slaughter 67 • Steer and heifer slaughter 80 • Hog slaughter 56 • Soybean mills 71 • Fluid milk 22 • Poultry processing 34 • Breakfast cereal 85

  18. Leaders • Beef • IBP/Tyson, Excel/Cargill, Swift/Conagra, Farmland, Smithfield • Pork • Smithfield, IBP/Tyson, Excel/Cargill, Hormel

  19. 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

  20. Concentration and Market Definition • Iowa steer and heifer slaughter • US steer and heifer slaughter • US cattle slaughter • All livestock slaughter • All protein production

  21. Barriers to Entry • Key resources • Inputs, $$$, skills • Patent • Economies of scale • Location • Information

  22. Workable Competition • Enough buyers and sellers to provide alternatives • No one can coerce a rival • Firms respond to profit and loss

  23. Workable Competition • No collusion • Enough entry and exit for rivals to challenge • Free access of buyers and sellers

  24. 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

  25. 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)

  26. 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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