Industry/Market Structure, Coordination, Power & Control

Question 1

What is the role of firms in a capitalist economy and why is it good?

Answer 1

• Private sector the engine of growth role of government is limited
• Prices are determined by the forces of supply and demand and are decentralized
• The firms in these markets compete to maximize profits and to satisfy and create value for the final consumers with their products and services. The behaviour of a firm is influenced by the structure of industry in which they operate
• Competition harnesses productivity that is utilization of available resources of production (land, labour and capital) to their maximum
• Efficient allocation of scarce resources improves living standards of the society as a whole. Efficiency measures input to output ratio and is an appropriate measure of market performance
• Consumers derive value or satisfaction from use of goods and services & monetarily reward the firms that please them

Question 2

What does the Industry and Firm in an economy do and how does it compete?

Answer 2

Firms that use similar factor inputs to make a group of related products.
• Firms offer a product or class of products that are close substitutes
supplied to a common group of buyers.
e.g. dairy industry, beef industry, automobile industry
• Industry is the prime focus of competitive forces and a firm’s behaviour is influenced by the structure of the industry in which it operates
• Firm is the basic unit of organization for productive activities, transforming inputs into outputs.

Question 3

How do you measure the performance of country’s economy?

Answer 3

• Gross domestic product (GDP) is a measure of economic activity in a country. It is the total market value of goods and services produced in a country within a fiscal year.
• GDP = private consumption + investment + public spending + net exports (exports – imports)

Question 4

What is the Primary sector concerned with?

Answer 4

• Primary sector is concerned with the extraction of
natural resources. Includes agriculture, horticulture, forestry, and fishing; the extraction of oils, minerals, and natural gas, mining and quarrying; and the water industry.

Question 5

What is the secondary sector concerned with?

Answer 5

• Secondary sector is concerned with the manufacture of goods from the raw materials supplied by primary-
sector industries. Includes the manufacturing industries and may also include construction.

Question 6

What is the tertiary sector concerned with?

Answer 6

• Tertiary sector is concerned with the provision of
services. The service industries includes, for example, the leisure industry, financial services, education and health services, transport, and communication.

Question 7

What does a Market mean?

Answer 7

• Market is an arena where buyers and sellers
exchange good and services (It does not have to have a
physical location)

Question 8

What two ways can competition be viewed?

Answer 8

1. Horizontal competition i.e. rivalry between firms at the same level e.g. processors or wholesalers or retailers
2. Vertical competition i.e. bargaining relationships between buyers and sellers of agriproducts / food and how consumer food dollar is divided (margins)

Question 9

What are the 4 general forms of market structures on the selling side?

Answer 9

1. Perfect Competition e.g. agricultural producers
2. Monopolistic Competition e.g. small food stores, restaurants, farm supply stores, feed manufacturers
3. Oligopoly e.g. large retailers, food processor & manufacturers (coffee, cigarettes, soft drinks) major farm machinery companies, farm chemical companies
4. Monopoly e.g. Power generation companies

Question 10

What are the 4 general forms of market structures on the buying side?

Answer 10

1.Buying side (analogous to selling side)
Perfect Competition e.g. agricultural producers
2.Monopsonistic Competition e.g. auction markets for livestock or fruit & vegetables
3.Oligopsony e.g. a few large meat processors or supermarket retail chains
4.Monopsony e.g. public utilities, milk processor located a long distance from other plants

Question 11

What is the structure-Conduct-Performance Model (SCP)?

Answer 11

• Structure–Conduct–Performance Model (SCP model) states that the structure or form of
a particular market (i.e. the level of concentration and presence or absence of barriers to entry)
• will determine the conduct (i.e. strategic behaviour) of buyers and sellers and the overall performance (i.e. social efficiency) of that market.

Question 12

What does Concentration and Competition mean?

Answer 12

• The degree of seller (or buyer) concentration – described by the number (one, few or many) and the
size distribution of firms in the market. Competition within an industry is determined by the degree of concentration
within groups of competing firms.

Question 13

What is the Structure of Australian Agriculture sector ?

Answer 13

• Production is generally comprised of large numbers of small business operations at the farm level (In 2011–12 there were around
136,000 farms in Australia)
• Processing is undertaken by a limited number of large firms. There are:
– 4 poultry processors accounting for 60 per cent of the market;
– 3 sugar millers accounting for 85 per cent of the market;
– 3 dairy processors purchasing more than 50 per cent of the milk supply;
– 4 major wool processors;
– 5 meat processors accounting for 40 per cent of the market share and 506 businesses sharing the remaining 60 per cent
• Retail is dominated by 4 large players that own 98% of
supermarkets. Woolworths (43 %) and Coles (37 %) dominate; has been increased presence of independent chains e.g. IGA and global supermarket chains e.g. Aldi and Costco

Question 14

What is product differentiation?

Answer 14

The extent buyers at each level in an industry perceive a difference in the products offered by the sellers.
At one extreme, the products can be perfect substitutes (homogenous) in the sense that the output of all sellers are identical.
The imperfection of substitution occurs, with varied scales of outputs, recognized by buyers.

Question 15

What are the barriers to entry and exit of the market?

Answer 15

The barriers to entry / exit – refers to the relative ease or difficulty with which new sellers may enter (exit) the market.
It determines the competitive relationship between established sellers (advantaged) and potential new entrants (disadvantaged).
Such barriers may include – patents
– licensing requirements
– entry quotas
– extremely high capital requirements
– loyalty to the brands of established firms
– high advertising expenditure
– tariffs and quarantine specifications (for export markets) phytosanitary conditions of entry to WA

Question 16

What does the Porters model study?

Answer 16

• Porter’s model studies how a firm best competes within a given industry structure and gives a broad competitive strategy to the firm(s)

Question 17

What are the 5 forces in the Porters Model?

Answer 17

1.Threat of New Entrants (Barriers to entry)
2.Rivalry among Existing Competitors
3.Bargaining Power of Suppliers
4.Bargaining Power of Buyers
5.Threat of Substitute Products
(Substitute Products)

Question 18

What do you look for in the Horizontal dimension?

Answer 18

• Horizontal dimension is relationships between businesses at
the same level of the system e.g. farmers

Question 19

What do you look for in the Vertical dimension?

Answer 19

• Vertical dimension is concerned with the coordination of business firms and their activities in supply chains from input supplier to the final consumer

Question 20

What are the extremes of these two dimensions?

Answer 20

In either direction, coordination can be an extreme of one firm controlling all the activities through common ownership
(monopoly for horizontal & vertical integration for vertical dimension)
OR the other extreme of a range of firms in the market (perfect competition) & invisible hand in work, or the contracts, partnerships & alliances (in a diverse market structure)

Question 21

What is Market Coordination?

Answer 21

• Food system - considerable amount of interdependence among all participants
• As a result, the processes and linkages from input supplier to the final consumer require coordination

Question 22

What are the means of influence in a market?

Answer 22

Means of Influence: Market Power & Cooperation
A firm has two ways by which it may seek to directly influence other firms (1. Market Power & 2. Cooperation in markets)

Question 23

What is Market Power?

Answer 23

Market power is an intangible characteristic of the markets and is largely known through its effects on prices, contract terms, firm behaviour and other features of the market.

Question 24

What is bargaining power?

Answer 24

Bargaining Power refers to the relative strength of buyers & sellers in influencing the terms of exchange in business transactions.

Question 25

What does cooperation in markets mean?

Answer 25

Cooperation in markets
i.e. business to business
cooperation for mutual
gain e.g. Product
differentiation or reducing
marketing costs (such as packaging, transportation, advertising and so on).

Question 26

What is Vertical integration mean?

Answer 26

Vertical Integration is when one company controls several stages in the food system by common ownership. The basic reason for companies to vertically integrate is
control (control raw materials, infant industry development, reduce dependency, risk coverage,
knowledge confidentiality).

Question 27

What does Horizontal control mean?

Answer 27

Horizontal Control has the same principles as vertical integration i.e. business to business cooperation for mutual gain.
The opportunities for cooperation, however, can be less obvious as 1) firms operating at the same level are primarily competitive and 2) there can be legal barriers
to cooperative activity between competing companies.

Question 28

What is the Industrialisation of the food system?

Answer 28

• Industrialization of the food system is the trend of closer linkages in the food marketing channels.
• It is a change from open-market, transaction based relationships to contracts and alliances.
• Industrialization is an organizational change driven by food manufacturers and distributors to have more control over the quantity and quality of products that they buy and sell.