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The Industrial Organization
Framework
Structure-Conduct-Performance
Structure Conduct Performance
Basic Conditions
Public Policy
Firm Decision Environment
Questions of Conduct
Υ Why does it matter if Safeway Australia
refuses bread deliveries from 3 regional suppliers?
Υ Why did cattlemen bring legal action
against Tyson regarding the use of “captive supplies” (cattle owned or forward
contracted by beef slaughter companies)
Conduct
ΥPricing Behavior ΥProduct Strategy ΥAdvertising ΥResearch & Innovation ΥCollusion
ΥMergers & Divestures ΥInformation use ΥExchange terms ΥLegal tactics
Actions of firms within the market, acting either independently or together
Firm Decision Environment
ΥAlternatives ΥIncentives ΥControl & influence Ψ Corporate structure Ψ Consistency between owners’ goals and management goals
Prescription Drug “Competition Matrix”
Cvs.co m
AmericanDrugStores.c Online Drugstore.com om
Supermarkets Safeway Krogers Albertsons
Others Wal-Mart Target … General Retail
Drug Stores CVS Walgreen RiteAid
Performance Defined
ΥBain
Ψ "The composite end results which emerge when a group of firms pursue their respective lines of conduct."
ΥCaves Ψ "The appraisal of how far the economic results of an industry's behavior fall short of the best possible contribution to reach particular goals."
ΥBrandow Ψ "How well an industry does the things that society might reasonably expect it to do."
Pseudo-Variety in Beer?
Υ Pseudo-Variety Ψ The illusion of variety / “Appearance of enormous diversity and bounty” w/ very little variety, except in packaging Ψ Anheuser-Busch (46% of U.S. Beer Market) Bud Light, Bud Dry, Bud Ice, Bud Ice Light , Michelob, Michelob Light, Michelob Dry, Michelob Ultra, Busch, Busch Light, Busch Ice, Natural Light , and Natural Ice Ψ Miller (over 29% of U.S. Beer market): Miller High Life, Miller High Life Lite, Miller High Life Ice, Miller Lite, Miller Lite Ice, Miller Genuine Draft, Miller Genuine Draft Light, Miller Ice House, Milwaukee Best, Milwaukee Best Light, and Milwaukee Best Ice.
The Case of Coffee
Exporter $0. Importer $1. Shop Owner -Instant Coffee $26.
Transportation toKampala $0.
Regional Miller $0.
Local Middleman $0.
Ugandan Farmer $0.
Producer Price/kg
Australian Bread Market Conduct…
Υ Safeway Australia Ψ Refused to accept bread from 3 bakeries. Ψ Bakeries were also supplying regional retail competitors that heavily discounted the bread. Ψ Re-established purchases after discounting ceased. Υ “Price fixing and misuse of market power”
Pickett, et al vs. Tyson Fresh Meats, Inc.
Υ Tyson Foods - Largest U.S. beef packer Υ Pickett, et al (American Cattlemen) claims: Ψ Tyson used Captive Supply (CS) inventories with the purpose or effect of lowering cash prices. Υ CS not necessary: Ψ for quality. Ψ to keep plants full. Ψ for efficiency. Ψ for risk management. Υ Only impact of CS is lower cash price Υ Initial ruling AGAINST Tyson; Later overturned
AEC 841-IO
“Captive Supplies” for 4 Largest U.S. Beef Packers (Ward, et al)
0
5
10
15
20
25
30
35
40
45
50
19881989199019911992199319941995199619971998199920002001
Percent
Packer Feeding Contracts/Agreements Total
Captive Supply Research
Υ Consistent relationship between increasing captive supplies and lower fed cattle prices
Ψ Elam (monthly data): $0.00 to - $0.37/cwt. Ψ Schroeder et al. (transaction data): -$0.15 to -$.31/cwt. Ψ Ward et al. (GIPSA transaction data): -$0.01 to -$0.36/cwt. Ψ Schroeter et al. (GIPSA transaction data): -$0.02/cwt.
Government’s Impact…
Υ Anti-trust laws Ψ Sherman Act (1890) Ψ Clayton Act (1914) Ψ Robinson-Patman Act (1936) Ψ Packers and Stockyards Act (1921) Ψ Capper-Volstead Act (1922) Υ Goal of anti-trust law Ψ Provide competitive business environment that allows achievement of society’s performance goals
Continuum of Vertical
Coordination
Internal Coordination
External Coordination
Contracting Ownership Integration
Spot Markets
Strategic Alliances
Barkema: New Roles and Alliances in the U.S. Food System
Food Chain Clusters…
”Vertical Consolidation?”
Υ “Supply Chain”/Marketing channel consolidation Ξ Alliances, integration, joint ventures Υ Dominant food chain “clusters” Υ Gene to Supermarket Ξ Control decision-making at many levels of the food chain Υ Performance: Balancing between efficiency and power
Increased Consolidation.... Opposing Views
Υ ”...Consolidation in U.S. agriculture is generally a positive trend, one that leads to lower priced, higher quality food products for consumers and a leaner industry better equipped to compete in global markets.” Drabenstott 1999
Υ ”New study finds consolidation harms nation’s consumers and farmers. The study reveals the complex web of relationships among a handful of firms in the food chain. Food is different than other goods and services, and it would be dangerous to permit a few major firms to control decision making throughout the entire food chain.” Heffernan 1999
The Industrial Organization
Framework
Structure-Conduct-Performance
Structure Conduct Performance
Basic Conditions
Public Policy
Firm Decision Environment
“Virtually every market attribute is influenced by other market attributes, and the chain of influence is circular and endless.”
Sosnick, pg. 84
