AGRICULTURAL PRICES
AND MARKETS
AGRICULTURAL PRICES AND MARKETS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
AGRICULTURAL PRICES AND MARKETS
Author: Imre Fertő
Supervised by Imre Fertő June 2011
ELTE Faculty of Social Sciences, Department of Economics
AGRICULTURAL PRICES AND MARKETS
Week 4
Market and market structure
Imre Fertő
Literature
• Tomek, W. G.–Robinson, K. (2003):
Agricultural Product Prices. Cornell University Press, Chapter 5
• Bukeviciute, L.–Dierx, A.–Ilzkovi, F.
(2009): The functioning of the food supply
chain and its effect on food prices in the
European Union. European Economy,
Occasional Papers 47| May 2009
Market and market structure
• Definitions of market – Qualitative approach – Quantitative approach
• Market structure
• Measuring market concentration
Definition of market
“My lament is that this battle of market definitions, which is fought thousands of times what with all the private antitrust suits, has received virtually no attention from us economists. Except for a casual flirtation with cross elasticities of demand and supply, the determination of markets has remained an undeveloped area of economic research at either the theoretical or empirical level.”
George J. Stigler (1982)
The purpose of the market definition
“Market definition is not an end in itself but a key step in identifying the competitive constraints acting on a supplier of a given product or service. Market definition provides a framework for competition analysis. For example, market shares can be calculated only after the market has been defined and, when considering the potential for new entry, it is necessary to identify the market that might be entered. Market definition is usually the first step in the assessment of market power.”
Office of Fair Trading 2004
Definition of market
• Two conceptions
– Economic market
• “the entire territory of which parts are so united by the relations of unrestricted commerce that prices there
take the same level throughout, with ease and rapidity.”
Cournot
• Focus on the factors determining the equilibrium prices – The concept of an antitrust market
• The boundaries of an antitrust market are determined
• by the hypothetical monopolist test: Small and Significant Nontransitory Increase in Prices (SSNIP)
• Emphasis on the identification of market power
• A market definition should normally contain two dimensions: a product and geographic area
Definition of market
• European Commission:
– The relevant product market comprises all those product and/or services which as regarded as
interchangeable or substitute by the consumers by reasons of product characteristics, their prices and their intended use
– The relevant geographic market comprises the area in which the undertakings concerned are
involved in the supply and demand of products or services, in which conditions of competition are sufficiently homogeneous which can be
distinguished from neighbouring areas because the
conditions of competitions are appreciably different
in those areas
Definition of market
• Qualitative approach
– Products are the same market and they are close substitutes
• Similar product attributes – production
• Similar use – consumption
• Selling products on the same market – geographical dimension
– Geographically different markets
• Selling products on the different markets
• Transportation of products is costly from one place to other
• Transportation of consumers is costly from one place to other
– Difficulties
• Definition of substitutes based on the product attributes
• Identification of the degree of substitutes
• To assess the importance of transport costs
Definition of market
• Quantitative approach
– Demand price elasticities
• Large own price elasticity – large number of substitutes – But we can not identify the substitutes
• Positive cross price elasticities – substitutes – Residual demand analysis
• How does competitors supply affect on the demand – Price correlation (Stigler-Sherwin, 1985)
• Two sellers are the same market, if their demand are influenced by the same factors
• High correlation between prices of two markets implies that they are substitutes
• Problems:
– How can we define the R square
– Stationary and non stationary nature of time series data
Definition of market
• Quantitative approach
– Elzinga–Hogarty test (1973) defined geographic boundaries on the basis of shipment flows
– They defined two measures of a region’s openness
• LIFO (little from outside) =Local Consumption from Local Supply/Local Consumption
• LOFI (little from inside) =Local Consumption from Local Supply/Local Production
– a region is a geographic market if both
measures are above 0,70 or if the average of
the two is above 0,90
Definition of market
• Other approaches
– Industrial or trade statistics
Market structure
• Conditions of market structures:
– Number of buyers and sellers
– Size distribution of buyers and sellers – Degree of product differentiations
– Opportunities to enter or exit from the
market
Types of market
• Based on the number of sellers
– Perfect competition. e.g. many agricultural commodities
– Monopol, e.g. Microsoft?
– Oligopol, e.g. Dupont, Monsanto, Pioneer – Monopolistic competition, e.g. frozen
vegetables
• Based on the number of buyers
– Monopson, e.g. marketing boards – Oligopson
• Others
– Bilateral monopol
Conditions of perfect competition
• Large number of small buyers and sellers, no one of which is large enough to influence price alone
• Homogeneous goods
• No artificial barriers on supply and demand or price such as government intervention or collusion between firms
• Factors of production are perfectly mobile, there are no entry or exit barriers, no barriers to capital, labour or to management
• Additional criteria
– Perfect knowledge
– Complete divisibility of product – Perfect mobility within the market
Measuring of market concentration
• Based on market share
– Concentration ratio (CR):
• E.g. the largest 4, 8, 10, etc. firms’ share on the particular market
– Herfindahl–Hirschman-index:
• HH=Σs
i2,where s
ithe share of a given firm
– Measurements borrowing from the literature on the inquality
• Gini coefficients
• Lorenz curve
Requirements for concentration measurements
• Concentration curve allows to rank firms
• Sales transfer-principle
– If a small firm transfers its sales to a large firm, then concentration will increase
• Entry condition
– If a new firm enter into the market, other firms relative weight do not change, concentration will decrease
– If a large firm enter into the market, concentration may increase
• Fusion condition
– If two or more firms merge, concentration will
increase
Example for measuring concentration
Market share A industry B industry
1. firm 30 70
2. firm 25 10
3. firm 20 5
4. firm 15 5
5. firm 4 4
6. firm 3 3
7. firm 2 2
8. firm 1 1
CR4 90 90
HH 2180 5080
Classification of markets based on HH intensity of price competition
Nature of competition HH index Intensity of price competition
Perfect competition HH<2000 strong
Monopolistic competition
HH<2000 Strong or weak depends on the product differentiation
Oligopol 2000<HH
<6000
Strong or weak depends on rivalries
Monopol HH>6000 Weak except entries may deter
