SUB TOPIC 2: APPROACHES TO THE STUDY OF AGRICULTURAL

MARKETING

Introduction

Agricultural marketing includes the services and functions of different institutions and
intermediaries. Agricultural marketing problems vary from commodity to commodity largely
due to the seasonality of production, the variations in its handling, storage, processing and the
number of intermediaries involved in them. Marketing economists have developed various
approaches to study agricultural marketing. The functional, institutional, commodity, the
behavioral system and the structure-conduct-performance approaches are the major ones. The
functional approach consists of all the activities performed in accomplishing the marketing
process, the institutional approach covers all market participants, the commodity approach
with the commodity at the pivot combines the previous two approaches, the behavioral
system approach looks at the behavior of the firms and the structure-conduct-performance
approach studies how the structure of the market and behavior of firms affect the
performance of markets. These approaches are employed because the role of marketing and
marketing firms will be explained based on them. In this Subtopic we will learn the details of
the various approaches to the study of agricultural marketing.

Objectives

After completing this Subtopic the students will be able to:

 Recognize the different approaches to the study of agricultural markets;
 Identify the pros and cons of the different approaches to the study of agricultural
markets;
 Familiarize themselves with the agricultural marketing functions, institutions and agents,
market processes, and issues of organization;
 Understand the structure-conduct-performance paradigm and how the nature of industry
is affected by market structure; and
 Apply these methods to a real world case, undertaking a diagnostic analysis of a specific
firm and environment.

Thematic plan
Contact hours Indep. Total
No. Topic
Lect. Sem Sub-tot study workload
1 Functional approach 0.5 0.3 0.8 2.0 2.8
2 Institutional approach 0.4 0.2 0.6 1.5 2.1
3 The commodity approach 0.1 - 0.1 1 1.1
4 Behavioral approach 0.5 - 0.5 1.5 2
5 The Structure-Conduct-Performance approach 1.5 0.5 2 4 6
Total 3 1 4 10 14

1.2.1 The Functional Approach

Marketing is sometimes thought of as simply the process of buying and selling though its
tasks go beyond this. The functional approach study the different activities performed in
changing the farm product into the product desired by the consumers. It includes all the
business activities performed by firms in the marketing system. There are three general types
of functions performed in any marketing system. These are the exchange functions, physical

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functions and facilitating functions. In what follows we will discuss each of this function in
detail.

1.2.1.1 The exchange functions

As mentioned earlier, exchange functions (buying and selling) are what are commonly
thought of as marketing. The buying function is concerned with the search for and evaluation
of products and services and obtain them. The selling function is concerned with promotion
of the products through personal salesmen and advertizing. In general they involve finding a
buyer or a seller, negotiating price and transferring ownership (but not necessarily physical
transfer). At this point, formal or informal property rights are vital to ensure the reliable
transfer of ownership and to guarantee legality (e.g. coffees on sale were not stolen and will
not be reclaimed). As products move through many hands before reaching the final user, title
changes several times. Each time title changes and a price must be set. This means that
pricing plays an integral part in marketing. This involves price negotiations and transferring
of product ownership through buying and selling activities.

Case study 1.2.1: The exchange functions

In the marketing of coffee in Ethiopia, the exchange functions (buying and selling) are
performed at the spot (open market), road side, wholesale, cooperative, retail, and export
markets.

Task 1.2.1: In your opinion what are the factors that influence coffee farmer in making a
choice between traders and/or markets?

1.2.1.2 Physical functions

The physical functions are those activities which involve handling and movement of the
commodity from producers to consumers. They include storage, transportation, processing,
manufacturing, handling and packing. It enables the actual flow of commodities through
space and time, and their transformation to a form desired by the consumer. Assembling or
concentrating the product at convenient places allows its efficient transportation. Storage
allows the commodity to be kept until the demand rises, thereby stabilizing supply.
Processing transforms the commodity into the products desired by consumers. Grading and
standardization allow the consumer to be more confident of the characteristics of the good
being purchased.

Transportation

Transportation provides desired changes in location. It allows the cultivating of a produce in

areas particularly adapted to their production and then moving them to the buyers. However,
the long distances over which a produce are transported often results in relatively high
transportation costs, and potentially lower quality, due to the damage during transport if the
products are not properly packed.

Handling and packaging

For transporting the product from seller to buyer, proper handling and packing are crucial. In
order for the product to be transported, it must be handled and packaged properly. Proper
packaging; preserves the moisture level and protects it from contamination, facilitates

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handling of the product, makes the final product more attractive to the buyers, and gives
instructions on how to handle, store and use it.

The material used for packaging is a major factor in regulating the moisture content of the
stored product. The selection of the packaging material is therefore crucial to preserve the
humidity level, and thus the viability of the product. Packaging material should be strong,
durable and well labeled. Many different materials are generally used for packaging
agricultural products. The selection of the most appropriate material and size is crucial and
differs according to type of storage and handling, distribution and commercialization needs.
Air-proof containers provide effective protection against insect damage, and fungi. The
thickness of the packaging and their uniformity determine their permeability to moisture. For
example, the Ethiopian Commodity Exchange (ECX) provides standard sacks to traders and
traders in turn provide these sacks to farmers for storing and transporting quality coffee that
meets the export standards.

Assembly

This activity enables us bring together products from a large number of farms scattered
around the countryside to a central point where they can be gathered in large lots, sorted,
graded and packaged according to the desired specifications in quantity ready for the market.

Storage

Most agricultural products storage is delicate, as specific temperature and proper packaging
must be observed to maintain the desired humidity level. The humidity of the air surrounding
the product affects its equilibrium moisture content. Storage requirements are different
depending on the product form (packaged or loose) and storage type (long term or short
term). Without proper storage, most agricultural products lose their taste. Poor quality
product generally results from poor drying and poor storage facilities. This affects the
marketability of the product as consumers will not engage in repeated buying behaviors
following low quality. Storage also facilitates the adjustment of product supplies to its
demand and reduces price fluctuations as the product can be kept for some period of time and
supply can be evened out, respectively.

Standardization and grading

Standardization refers to the determination of the standards to be established for different

commodities. It is the establishment of quality and quantity measurement that makes selling
and pricing possible. Standards are set on the basis of certain features such as size, weight,
color appearance, texture, moisture content, amount of foreign matter present, etc. Grading,
however, refers to sorting of product attributes into uniform categories according to the
quality specifications laid down. Grading follows standardization. It is a sub-function of
standardization.

Grades and standards assist market participants to determine the price because both of them
will know specifically what type of product they are dealing with under a grading and
certification system. Grading is important when the buyers demand products that meet
specific standards and/or when producers want to be paid according to the quality of their
products. It not only increases buyer‟ satisfactions but it also provides incentive to producers
to improve qualities and improve overall efficiency of the prevailing market.

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The presence of grading and standardization system in a market will enable market
participants to have balanced information about the quality of the product. Thus, in such
system a good quality product will be sold at a higher price than poor quality ones. However,
in the absence of grading and standardization system, sellers are likely to have better
information about the quality of a product than buyers. This is one of the causes for market
failures termed as information asymmetry discussed under Sub-Topic 1. In such markets poor
quality products „the lemons‟ are likely to force good quality products of the same type out of
the market. In other words, sellers will have less incentive to supply good quality products as
buyers cannot identify good quality products from bad ones and hence will not be willing to
pay higher prices for the good quality products. In the presence of information asymmetry
between buyers and sellers, sellers are likely, in the short run, to exploit buyers by charging
higher price for poor quality products. In the long run, the market is likely to be dominated by
poor quality products. This is because, since buyers lack information about the quality of the
product, they have no incentive to pay higher price rather they attempt to minimize risk by
going for lower prices. Similarly, sellers will have no incentive to invest to improve the
quality of the product as they cannot persuade buyers that their product is actually good
quality. Hence in the long run, the market will be dominated by „lemons‟.

Case study 1.2.2: See the video clip on the standardization and grading of
coffee in Ethiopia.
Task 1.2.2: After looking at the video clip, discuss the pros and cons of standardization and
grading in the Ethiopian coffee markets.

1.2.1.3 Facilitating functions

Facilitating functions are those activities which enable the exchange process to take place.
Product standardization, financing, risk bearing and market intelligence are the four
important components of facilitating functions. Facilitating functions are not a direct part of
either the change of title or the physical movement of produce, but the facilitation of these
activities.

Standardization

As was discussed earlier standardization simplifies exchange functions and reduce marketing
costs by enabling buyers to state what they want and sellers to convey what they are able and
willing to supply with respect to both quantity and quality. In the absence of standardization
trade either becomes more expensive or impossible altogether.

Financing

In any production system, it is true that there are lags between investing in the necessary
inputs and receiving the payment for the sale of produce. During these lag periods some
individual or institution must finance the investment. The question of where the funding of
the investment is to come from, at all points between production and consumption, is one that
marketing must address. Consider the problem of an exporter who wishes to have good
quality coffee for export where few farmers have the necessary drying and packaging
materials, and storage facilities. This is a marketing problem. These could be solved by the
exporters or some other institutions providing these facilities to coffee producers.

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Risk bearing

In both the production and marketing of produce the possibility of incurring losses is always
present. Physical risks include the destruction or deterioration of the produce through fire,
excessive heat or cold, pests, floods, earthquakes etc. Market risks are those of adverse
changes in the value of the produce between the processes of production and consumption. A
change in consumer tastes can reduce the attractiveness of the produce and is, therefore, also
a risk. All of these risks are borne by those organizations, companies and individuals.

Market intelligence

It is true that marketing decisions should be based on reliable information. Market

intelligence refers to the process of collecting, interpreting, and disseminating information
relevant to marketing decisions. Its role is that it reduces the level of risk in decision making.
Through market intelligence the seller finds out what the buyer needs and wants. The
alternative is to find out through sales, or the lack of them. Marketing research helps establish
what products are right for the market, which channels of distribution are most appropriate,
how best to promote products and what prices are acceptable to the market. Intelligence
gathering can be done by the seller, government agency, the ministry of agriculture, or some
other concerned organization.

Case study 1.2.3: Limited market information and institutional environment

In the coffee marketing in Ethiopia, limited information at all levels of the marketing chain,
limited government intervention, credit access especially for suppliers, infrastructure, etc. are
the major problems mentioned by market participants.

Task 1.2.3: Discuss in general the impact of policy environment on the performance of
markets. Why is government intervention in the markets justifiable? Also discuss how
conducive is the policy environment in SSA for markets to perform well?

1.2.2 Institutional Approach

The institutional approach examines agencies and institutions which performs various
functions in the marketing process. It focuses on the study of the various institutions,
middlemen and other agencies which add utility to the product. These organizations or
market participants are those who perform the activities necessary to transfer goods from the
producer to consumer, because of the benefit of specialization and scale that exist in
marketing.

It is classified into five: Merchant middlemen, agent middlemen, facilitative organizations,

processors and manufacturers (millers) and speculative middlemen. The question is that why
the institutional approach? We are interested in the institutional approach because
middlemen‟s specialization in performing a specific marketing functions leads to
improvement in productivity and hence a decreased cost. This in turn results in price fall
adding to the overall efficiency of the market. The second reason is the gains from
specialization. Marketing functions are marked by economies of scale. Hence specialization
reduces cost and hence improves efficiency. Average cost of performing marketing functions
falls as the volume of products handled rises. Finally middlemen reduces market search and
transaction costs.

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The number, level of competition, pricing behavior, relationship, etc. of the various
marketing agents or institutions is crucial in analyzing a given market. Thus, the institutional
approach studies how these institutions respond to changes in market incentives. It also helps
to design appropriate intervention strategies intended to improve the performance of the
market. Agricultural marketing studies are hardly complete without incorporating the
institutions involved in moving the product from the points of production until it reaches the
final consumers. The presence of collusive act among agents at a given stage of the market
chain or the level of monopoly power enjoyed by some of the agents will have greater
implications in determining the marketing costs (and hence the final price) and the overall
performances of the market.

1.2.2.1 Merchant middlemen

These middlemen have properties in common in that they take title to, and therefore own, the
products they handle. They buy and sell for their own profit. Merchant middlemen can be
divided into two: Retailers and wholesalers.

Retailers

They are merchant middlemen who buy products for resale directly to the ultimate
consumers. Retailers may perform all of the marketing functions. Mostly, their number is
large compared to other merchant middlemen.

Wholesalers

They are merchant middlemen or manufacturers who sell to retailers, other wholesalers,
and/or industrial users but do not sell a significant amount to ultimate consumers. They make
up a highly heterogeneous group of varying sizes and characteristics. They can be local
buyers or rural assemblers who buy goods in the producing area directly from farmers and
transport the products to the larger cities where they are sold to other wholesalers and
processors. For example, in the marketing of coffee in Ethiopia, there are local assemblers
who buy coffee from farmers in rural areas and transport in bulk to district towns for
processing and then ship the products to Dire Dawa for selling it to exporters which are
wholesalers themselves. These wholesalers/assemblers/ can handle different agricultural
products or can specialize in handling a limited number of products. They may be cash-and-
carry wholesalers or service wholesalers who will extend credit and offer delivery and other
services.

1.2.2.2 Agent middlemen

Agent middlemen, as the name implies, act only as a representative of their clients. They do
not take title to and therefore do not own, the products they handle. While merchant
middlemen (wholesalers and retailers) secure their income from a margin between the buying
and selling prices, agent middlemen receive their income in the form of fees and
commissions. Agent middlemen in reality sell services to their principals, not physical goods
to customers.

In many instances, the power of agent middlemen is market knowledge and “know-how”
which they use in bringing buyers and sellers together. Though the names may differ
somewhat, agent middlemen can be categorized into two major groups,
commission-men and brokers.

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Commission-men

They are usually given broad powers by those who transfer goods to them. They normally
take over the physical handling of the product, arrange the terms of sale, collect, deduct their
fee, and remits the balance to his principal.

Brokers

Brokers, on the other hand, usually do not have physical control of the product. They usually
follow the directions of his principal closely and have less discretionary power in price
negotiations than commission-men. They just act in between the sellers and buyers, link them
and assist in negotiations. In agriculture, livestock commission-men and grain brokers on the
grain exchanges are good examples of those commission-men and brokers, respectively.

Case study 1.2.4: ECX’s involvement in the coffee market in Ethiopia

After the Ethiopian Commodity Exchange (ECX) has been introduced to the coffee
marketing of Ethiopia, some marketing agents such as village assemblers and brokers were
legally restricted from involving in the coffee marketing. In addition to this, the ECX has also
established 3 to 5 local trading centers in each major coffee producing woredas. The purposes
of these centers were to create conducive environment for open, competitive and accessible
local markets and to facilitate preliminary quality inspection and advisory support. These
centers were also to be used as market information points for displaying the prevailing prices.
However, most of these coffee local trading centers are not operational.

Task 1.2.5: Discuss whether the restriction of these agents from the marketing of coffee will
improve the marketing performance of coffee or not. In addition, what are the possible
reasons why traders are not willing to buy coffee at the common market places?

Case study 1.2.5: Commission men at the auction market

Even though there are no brokers and commission men at the lower level of the marketing
chain (between producers and wholesalers), there are commission men working as agents for
coffee suppliers at the auction market (Addis Ababa). The roles of these commission men are
bidding at the auction floor, speculation, etc. These commission men are required to have
least a 10000 Birr on their account by ECX to avoid some acts of tacit collusion with the
exporters.

Task 1.2.5: Why did ECX allow commission men to operate at the auction market though
not at the lower level of the marketing chain? Discuss.

1.2.2.3 Speculative middlemen

Speculative middlemen are those who take title to products with the main objective of
making profits from price fluctuations. All merchant middlemen, of course, speculate in the
sense that they must face uncertain conditions. More often, however, wholesalers and
retailers attempt to secure their incomes through handling and merchandizing their products
and to hold the uncertain aspects to a minimum. Speculative middlemen seek out and
specialize in taking these risks and usually do a minimum of handling and merchandizing.
They usually attempt to earn their profits from the short-run fluctuations in prices. Purchases
and sales are usually made at the same level in the marketing channel. Speculative

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middlemen often perform a very important job as a competitive force in the protection of an
adequate pricing structure.

Case study 1.2.6: Limited speculation in the coffee market in Ethiopia

Speculation is limited by regulation in the coffee market. For instance, coffee suppliers once
they supplied their coffee to ECX warehouses are required to sell it to exporters or domestic
sellers at the auction within 30 days. Similarly, exporters have to process and supply to ECX
warehouse within a given time limit.

Speculation is limited by regulation in the coffee market. For instance, coffee suppliers once
they supplied their coffee to ECX warehouses are required to sell it to exporters or domestic
sellers at the auction within 30 days. Similarly, exporters have to process and supply what
they have bought from farmers/producers to ECX warehouse within a given time limit.

Task 1.2.6: Discuss whether the actions of limiting speculative act can be justified or not.

Case study 1.2.7: The institutions involved in the marketing of Harar coffee and their
functions

A case study on Harar coffee marketing followed the major marketing channels in Eastern
Ethiopia from production to the export levels. The major marketing agents involved in the
coffee marketing channel and their major functions can be summarized as follows.

Producers
The major functions operated by coffee producers are:
 Production
 Drying (partially)
 Short-term storage for better prices
 Transporting to traders (partially)
 Selling
Traders (Assemblers)
Traders and/or assemblers operate the following marketing functions:
 Colleting the produce from farm households (buying)
 Drying (partially)
 Transporting to processors
 Selling to processors
Trader-processors (Suppliers)
Coffee trader-processors operating at the first stage (district level) processing are those who
are involved in hulling of dried coffee. These initial coffee processors may or may not have
their own hulling machineries. Those without hulling machineries pay for hulling services.
The major functions they perform are the following:
 Further drying of the assembled coffee
 Hulling coffee beans
 Classifying hulled coffee
 Hand-picking of hulled coffee
 Transporting to the ECX warehouses
 Selling at the auction market

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Note also that in the southern part of the country trader-processors also perform pulping (red
cherry beans processing). This processing was not conducted in the eastern part of the
country due to shortage of high pressure water supply that pulping requires.
Exporters
All coffee exporters‟ further process the coffee they purchased at the auction market to meet
the standards of ECX and their buyers. The major functions of the exporters are the
following:
 Buying coffee at the auction market
 Remove the pulp from hulled coffee
 Classifying and hand-picking
 Packing of coffee for export
 Transporting to the buyer via Djibouti port (through transport operators)
 Roasting, packing and distributing ungraded coffee to local traders
Other marketing agents
Other marketing agents involved in the marketing of coffee are the following:
 District coffee team: Under the district agricultural office, this team controls the quality
of coffee, regulate the marketing system, and control the moisture content of the coffee to
be transported to the ECX warehouses.
 ECX: This is the only legal broker and warehouse operator of coffee offered to the
Exchange.
 Transport operators: These are agents which provide transport services, but may or may
not be involved in coffee business.

Task 1.2.7: Consider the maize markets in Kenya. Compare the marketing institutions
involved and functions performed in the marketing of this product with that of coffee in
Ethiopia?

1.2.2.4 Facilitative organizations

Facilitative organizations assist the various middlemen in performing their tasks. Such
organizations do not directly participate in marketing process as either merchants or agents.
One group of these organizations provides the physical facilities for the handling of products
or for bringing buyers and sellers together. They take no direct part in the buying and selling
of the products. However, they establish “the rules of the game” which must be followed by
the trading middlemen, such as hours of trading and terms of sale. They may also aid in
grading, arranging and transmitting payment and the like. They receive their income from
fees and commissions from those who use their facilities. Another group of organizations
falling in this general category is the trade associations. The primary purpose of a large
majority of these organizations is to gather, evaluate, and disseminate information of value to
a particular group of traders. They may carry on research for mutual interest.

These organizations, though crucial for smooth and efficient functioning of markets, are
mostly missing and when they are present, they are poorly organized in SSA countries in
general and in the agricultural markets in particular. Many of the problems observed in
agricultural marketing could be attributed to the absence or poor functioning of institutions
offering such services as financial, insurance, standardizing and grading, etc services. These
institutions contribute for the development of agricultural markets by facilitating the buying
and selling activities, by easing and speeding up the physical functions, by reducing
information asymmetry, by promoting the marketing organizations, etc.

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Case study 1.2.8: Facilitative organizations in the coffee markets

The facilitative organizations participating in the coffee marketing in Ethiopia include,

district agricultural office, cooperatives/unions, government and private banks, informal
lenders, ECX and Coffee Quality Inspection Office.

Task 1.2.8: Identify the facilitative organizations participating in the other similar
agricultural commodity market in your area and discuss about the roles of each
institution/organization in improving the performance of the market.

1.2.3 The Commodity Approach

This approach simply follows one product, such as coffee, and studies what is done to the
commodity and who does it as it moves through the marketing system. It helps to pinpoint the
specific marketing problems of each commodity as well to develop the market for the specific
commodity. The approach follows the commodity along the path between producer and
consumer and is concerned with describing what is done and how the commodity could be
handled more efficiently. It combines both functional and institutional approaches. It is
extremely useful to the person who is interested in only one product since it does allow in-
depth analyses. However, it has also a disadvantage because it ignores the between product
and market alternative and also the multi-product firms. As opposed to the analysis of general
equilibrium or any other sort of that kind, this approach deals about the marketing of a single
commodity or certain commodity groups such as grain marketing, food marketing. Thus, it is
difficult to see the interaction and interrelationships that exist among commodities which
could have important implications governing the behavior of the market and market agents.
Note that our case study is a commodity approach as we only followed coffee marketing from
producers to exporters.

1.2.4 Behavioral Systems Approach

This approach refers to the study of behavior of firms, institutions and organizations, which
exist in the marketing system. It tries to answer the question how does the market or
marketers behave and perform. The marketing process is continually changing in its
organization and functional combinations. An understanding of the behavior of the
individuals is essential if changes in the behavior and functioning of the system are to be
predicted.

Under this approach, marketing firm is considered as a system of behaviour and the emphasis
is on “how” change occurs. This approach views marketing as a system within which
subsystems are interrelated and interacting each other. And the operation of the system is the
results of the interrelationship and interactions of the subsystems. The behavioral system
approach thus studies the behavior of each subsystem and predicts its implications to the
main system. The point of interest is the people who are making decisions to solve particular
marketing problems. This behavioral system allows systems to be identified with the
particular problem being addressed.

This approach tries to answer the following questions:

 Can changes be made in the marketing system to lower the price to consumers?
 Are producers/manufacturers responding to the needs of the consumer?
 Are producers receiving an “adequate” return on their investments?

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  Are traders‟ abusing their market power or providing incorrect market information?
In the behavioral systems approach the following are important: The input-output system, the
power system, the communication system and the adaptation to internal and external changes.

1.2.4.1 The input-output system

It identifies motives and means of affecting the input–output ratio. How can a firm or a group
of firms use input resources that are costly and scarce to secure a satisfactory output? What is
the optimal combination of inputs to produce a profitable level of output? This is what is
called technical or operational efficiency. If we compare two firms, say A and B, firm A is
technically efficient if it produces the same level of output as firm B with fewer inputs.
Pricing or allocative efficiency, on the other hand, refers to the efficient allocation of
resources to produce maximal output. The obvious disadvantage of this method is that it is
abstract in nature and the reliance on intimate knowledge of individual‟s firm characteristics
and behavioral interactions.

1.2.4.2 The power system

Firms have a status and a vested interest in the role they are playing. For example, reputation
for quality, to be market leaders, community conscience and attaining fast growth. It tries to
answer the questions, how is their motivation and competence to grow and expand, to be
innovators or followers etc.? It studies the level and type of market power of each buyers and
sellers in the market and analyzes the implications in shaping their behavior in the market.
Economic theory of monopoly and competition behavior gives insights into this system of
behavior. Market power is the ability to affect prices. Oligopoly (selling power) and
oligopsony powers (buying power) are the two non-competitive marketing behaviors of
traders. Monopoly (one seller) and monopsony (one buyer) are the two extremes of these
non-competitive marketing behaviors.

1.2.4.3 Communication systems

Farmers and traders must get information to make appropriate marketing decisions. However,
market information, especially in SSA are limited, and if they exist they are mostly
unreliable. These problems are mainly due to lack of effective channels of information and
direction and misinterpretation. Hence the question of how to establish effective channels of
information is very important to improve the marketing performance.

1.2.4.4 Adapting to internal and external changes

If change is the essential characteristics of marketing, then how to adapt to these changes is a
major problem. As a rule, firms desire to survive and are ready to pay so to adapt to changes.

In summary, all the four behavioral systems are components of the operation of a marketing
system at any one time. A firm may forgo the ultimate in input-output solution because its
communication systems have broken down or because of considerations of its power
situations. For example, a firm may, prefer integrating with another firm in order to improve
its internal communication problems or to enhance its power in the market place.

1.2.5 The Structure-Conduct-Performance (S-C-P) Approach

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Let us start this section by posing the following question. In many African countries during
the 1980s and 1990s, there were legal prohibitions against small grain mills competing with
large industrial millers. Why have many economists argued that such restrictions need to be
removed if grain farmers are to benefit from structural adjustment programs?

The Structure-Conduct-Performance (S-C-P) paradigm sometimes called the traditional

industrial organization was a principal approach to study the industrial organization (IO)
during the second half of the 20th century. It was recognized as one of the most efficient and
reliable means to analyze an industry or more specifically, the market power-profitability
relationship in an industry. By industrial organization we mean a body of economic research
which studies how firms and markets are organized, their interaction, and how this interaction
affects market outcomes, and ultimately society‟s welfare.

The S-C-P paradigm was first developed by Edward Mason and Joe Bain in the 1940s and
1950s. It is an analytical approach used to study how the structure of the market and the
behaviour of sellers affect the performance of markets.

1.2.5.1 Elements of S-C-P

Market structure

Market structure consists of the relatively stable features of the environment that influence
the behaviour and rivalry among the buyers and sellers operating in a market. For example, if
the market structure is characterized by high barriers to entry, it may result in only a few
traders profitably maintaining the business activities. These few traders may engage in non-
competitive behaviour such as collusion2 and exclusionary or predatory3 price setting
behavior. These non-competitive behaviors can result in excessive profits and widened
marketing margins4 for traders. Concentration can also result in low producer shares 5 for
farming households which can have a significant impact on the income of producers and on
their purchasing power that depend on the market as the source of food.

The major structural elements which are most critical to performance analysis are the
following:
1. Concentration
This refers to the number of buyers and sellers in the market. When there are few buyers and
sellers, they may engage in non competitive behaviors such as collusion and price
discrimination. When there are few buyers of a commodity, traders offer sellers low prices
which reduce the income of sellers. If there are few sellers of a commodity in the market,
then sellers gain market power and increase prices, which reduce the amount of commodity
that buyers can purchase with a given amount of income, therefore, making them relatively
poorer than if prices were lower.

The most commonly used measures of concentration are:

i. Concentration Ratio (CRr)

2
When rival companies and traders cooperate, overtly or covertly, for their mutual benefit.
3
Exclusionary or predatory pricing occurs when one firm lowers and maintains its price below costs until other
efficient firms exit the market. Predatory pricing eliminates competition (results into monopoly power)
4
A marketing margin is the difference between the prices observed at different points in the supply chain when
quantities are expressed in comparable units of a commodity.
5
A producer share in this brief refers to the percentage of the price received by the farmer over the price paid by
the consumer for a commodity expressed in comparable units.

34
This measure shows the proportion of the industry‟s output accounted for by r largest firms:
r
CRr   S i
i 1
Where: Si = The market share of firm i

The ratio shows the joint market share of the largest r firms in an industry. Once the
aggregate data of the industry and that of the r largest firms is accessible, the ratio can be
determined, avoiding the complications of dealing with the individual accounts of the fringe
of numerous small firms in the industry.

The use of concentration ratio with firm level data has been criticized for two main reasons:
First, it ignores the relative size variation across the r largest firms. As a result the same
concentration ratio could describe a market where there are r similarly sized firms or a
situation where one of the r firms dominates. Secondly, it neglects all except the largest r
firms. This makes it defective because it gives the feeling that the two markets with the same
shares held by the r largest firms have identical concentration ratios even though one market
contains more firms in total and is likely to be more competitive. It is important to note here
that the most studies in industrial organizations used the first four largest firms (r = 4) and
only few studies used the first eight largest firms(r = 8).
ii. Herfindall-Hirschman Index (HHI)
The HH index is the sum of squares of the market shares of each of the firms in the industry:
n 2

HHI   S i
i 1
where, n is the total number of firms.

In an ideal situation where all n firms are of equal size, then HHI = 1/n. The strength of the
HHI lies in its ability to combine information on both the number and the size distribution of
firms. For this reason it is the preferred measure of concentration. However, its data
requirements are immense as its calculation would demand firm level data for all individual
firms in the industry. It is also noted that the squaring of market shares gives greater weight
to larger firms. In practice, many different distributions could give the same value of the HHI.
iii. Gini-coefficient (GC)
It measures the size of firms ranked from the smallest to the largest as a percentage of the
number of firms in the market, plotted against the cumulative output of these firms. The
greater the deviation from the diagonal line, the greater the inequality in firm size is. The GC
is a measure of statistical dispersion most prominently used as a measure of inequality of
wealth or product distribution. The GC can range from 0 to 1; it can also be multiplied by 100
to range between 0 and 100.

GC can be computed using different formulas having their own levels of bias. In this case, the
GC of the suppliers is calculated as:
D
G
2Q
i k
D  2 n( X i )[1  n( X i 1  X i )]
i 1
where
G = Gini coefficient,
D  Coefficient of mean difference,
n(Xi) = Cumulative frequency for class i,

35
1-n(Xi+1-Xi) = Cumulative relative frequency for class i,
k = Number of classes,
X = Quantity suppleid,
Q  Mean of the total quantity supplied, and
X  Mean of the product controlled by the ith class.
It is more intuitive to think of the GC as half of the relative mean difference. The mean
difference is the average absolute difference between two items selected randomly from a
population, and the relative mean difference is the mean difference divided by the average, to
normalize for scale. As a mathematical measure of inequality, the GC carries no moral
judgment about whether a particular level of inequality is good or bad. The GC is usually
defined mathematically based on the Lorenz curve, which plots the proportion of the total
share of the traders (y-axis) that is cumulatively shared by the bottom x% of the traders
(Figure 5). The line at 45 degree thus represents perfect equality of market shares. The GC
can then be thought of as the ratio of the area that lies between the line of equality and the
Lorenz curve (area A) over the total area under the line of equality (area A and B). Thus, the
Gini coefficient summarizes the Lorenz curve as:
A
G
A B

Figure 5 Graphical representation of the Gini-coefficient

Task 1.2.9: Use the data available from the case study to analyze the concentration ratio in
the coffee marketing in Ethiopia using Gini-coefficient.
2. Barriers to entry
Barriers to market entry include a number of different factors that restrict the ability of new
competitors to enter and begin operating in a given industry. For example, an industry may
require new entrants to make large investments in capital equipment, or existing firms may
have earned strong customer loyalties that may be difficult for new entrants to overcome.

The ease of entry into an industry is important because it determines the likelihood that a
company will face new competitors. In industries that are easy to enter, sources of
competitive advantage tend to wane quickly. On the other hand, in industries that are difficult
to enter, sources of competitive advantage last longer, and firms also tend to develop greater

36
 operational efficiencies because of the pressure of competition. The ease of entry into an
industry depends upon two factors: the reaction of existing competitors to new entrants; and
the barriers to market entry that prevail in the industry. Existing competitors are most likely
to react strongly against new entrants when there is a history of such behavior, when the
competitors have invested substantial resources in the industry, and when the industry is
characterized by slow growth.

The six major sources of barriers to market entry are the following:
1. Economies of scale: Economies of scale occur when the unit cost of a product declines as
production volume increases. When existing competitors in an industry have realized
economies of scale, it acts as a barrier by forcing new entrants to either compete on a large
scale or accept a cost disadvantage in order to compete on a small scale. There are also a
number of other cost advantages held by existing competitors that act as barriers to market
entry when they cannot be duplicated by new entrants-such as proprietary technology,
favorable locations, government subsidies, good access to raw materials, and experience and
learning curves.
2. Product differentiation: In many markets and industries, established competitors have gained
customer loyalty and brand identification through their long-standing advertising and
customer service efforts. This creates a barrier to market entry by forcing new entrants to
spend time and money to differentiate their products in the marketplace and overcome these
loyalties.
3. Capital requirements: Another type of barrier to entry arises when new entrants are forced to
invest large financial resources in order to compete in an industry. For example, certain
industries may require capital investments in inventories or production facilities.
4. Switching costs: This refers to a one-time cost that is incurred by a buyer as a result of
switching from one seller‟s product to another. Examples include retraining employees,
purchasing support equipment, enlisting technical assistance, and redesigning products. High
switching costs form an effective entry barrier by forcing new entrants to provide potential
customers with incentives to adopt their products.
5. Access to channels of distribution: In many industries, established competitors control the
logical channels of distribution through long-standing relationships. In order to influence
distribution channels to accept a new product, new entrants often must provide incentives in
the form of price discounts, promotions, and cooperative advertising. Such expenditures act
as a barrier by reducing the profitability of new entrants.
6. Government policy: Government policies can limit or prevent new competitors from entering
industries through licensing requirements, limits on access to raw materials, pollution
standards, product testing regulations, etc.

Case study 1.2.10: Barriers to entry in the coffee market

Coffee traders noted that the main entry barrier in the coffee marketing in eastern Hararghie
is capital. Coffee trading requires huge capital investment. Because of financial constraints
most coffee traders especially from Gelemso area left the coffee market.

Task 1.2.10: Consider one agricultural commodity in your area and assess the barriers of
entry in the marketing of this product.
3. Vertical coordination/ integration
How are members of the industry linked to other levels of the marketing chains? The income
of farmers will be affected depending on whether traders buy produce directly from them,
middlemen, or transporters. If farmers sell their products in terminal, spot or auction markets,
they obtain efficient or competitive prices because many buyers and sellers converge in
terminal, spot or auction markets. However, spot market prices tend to be volatile, therefore

37
subjecting households to price and income risks when prices fluctuate due to changes in
supply and demand for food commodities. In addition, farmers can deliver commodities to
spot markets but fail to sell when there are few buyers.

Task 1.2.11: Consider one agricultural commodity in your area and analyze the structure of
the market using these indicators.

Market conduct

Market conduct refers to the patterns of behaviour that traders follow and how they adjust to
changing market conditions. Examples of market conduct include pricing strategies, collusive
behaviour, mergers, etc. For example, in an environment where there are many buyers and
sellers, the market tends to determine the price. If one trader tries to increase his or her price,
he or she sells nothing. This means that households buy food commodities and agricultural
inputs at prices that equal to the costs of producing the last unit of the commodities (marginal
cost). In contrast, if there are only a few sellers of food commodities in a market, these few
traders can conspire and charge consumers higher prices, up to the level where consumers
can afford to buy from nearby market at a lower cost.
1. Pricing strategies
The behaviour of firms in setting their prices also plays a vital role in the S-C-P paradigm.
Here the following questions are important. Who sets the price? How are prices determined?
Price strategies like price discrimination, predatory pricing, and price fixing are only a few
examples. Price discrimination refers to a situation where firms are selling the same product
at different prices to different customers. Price fixing on the other hand refers to a situation
where market structure does not allow sellers to sell products at prices below listed prices.
The predatory pricing on the other hand allow products to be sold at prices below production
costs. The main purpose of these strategies is to acquire market share, thus monopolistic
profits.
2. Mergers
Market conduct, of which market power results, can also be viewed as a way in which the
firms behave in order to increase market share. Three different types of mergers can be
identified namely, horizontal mergers, vertical mergers and conglomerate mergers.
Horizontal mergers occur when firms in the same industry combine. Vertical mergers occur
when firms combine at different stages of the production process. Conglomerate mergers on
the other hand combine unrelated firms.
3. Collusive behavior
Imperfect competition in the market does not always depend on the size of firms, but also on
the behavior of firms. In a market with few competitors firms can decide whether to be non-
co-operative or cooperative. In order to minimize competition amongst them; firms tend to
co-operate engaging in collusion. This creates a situation where firms jointly set prices and
outputs as well as sharing the market amongst them. Cartelization is another form of
collusive behavior. It comprises of a set of independent firms that produces similar products
working together to raise prices and restricts output.

Task 1.2.12: Consider one agricultural commodity in your area and analyze the market
conduct using the above indicators.

Market performance

Market performance may be defined as the composition of end results in the dimensions of
price, output, production cost, selling cost, product design and so forth which enterprises

38
arrive at in any market as the consequences of pursuing whatever lines of conduct they
espouse. It refers to the extent to which markets result in outcomes that are deemed good or
preferred by society. For example, regular and predictable availability of basic commodities
at affordable prices is generally considered a desirable outcome. Other desirable outcomes
would be that traders do not obtain excessive profits, and that commodities meet certain
sanitary standards. In addition, prices paid by consumers should not be excessively above the
cost of marketing, processing and transaction costs for a given commodity, and the prices
received by producers should cover their costs of production.

Evaluations of market performance may be made from several standpoints. One objective
which has long occupied a central place in economic theory, and which is sometimes claimed
to be the basis of much existing public policy towards business, is that of maximizing the
welfare derived by the community from the use of its scarce productive resources. The
welfare of the community is said to depend on the level of subjective satisfaction experienced
by each of its individual members, and this in turn will be influenced by three aspects of
economic performance, namely, how the community‟s resources are allocated between
different kinds of output, what methods are used to produce the output, and how the output is
allocated among members of the community. These aspects of economic performance refer to
allocative, technical and distributive efficiency. Classical theories of perfect competition are
unexceptionable as such but it is generally recognized that for practical applications
something more is required. The conditions of perfect competition are never collectively
encountered in practice and even the individual conditions are not seen very frequently. Price
levels and stability (long-run, short-run and through space), profits, margins and costs
volumes, product quality and variety and distributions within the market are some indicators
of market performance.

1. Price levels and stability

i. In the long run

If consumer prices for goods are higher than normal during the same period of time in
previous years, then market dependant households with fixed amount of money have reduced
access to goods from the market. However, if prices are stable and affordable, households
that depend on the market for food, become more food secure.

ii. Over space

The difference between consumer prices in two nearby locations differs by more than
transport, marketing and transaction costs. This spatial difference can indicate that areas with
high prices are more affected compared to those where prices of staple food crops are lower.
Factors that cause this include poor infrastructure, civil unrest and climatic conditions.

iii. In the short run

Consumer prices of food crops and products change very frequently over a short period of
time in some areas. This subjects poor households to uncertainty and possibly reoccurring
price shocks because food becomes very expensive to buy and planning or budgeting for
basic food expenditures becomes very difficult.
2. Profits (net returns)
If traders receive excessive profits or net returns from sales of food commodities, this implies
that traders are overcharging food commodities, compared to costs they incur, thus reducing
the amount of food that poor households can access relative to fixed incomes.

39
3. Margins and costs

There are large differences between prices paid by consumers and prices received by farmers
compared to marketing, processing and transaction costs for a given commodity. This
indicates that produce buyers or processors are underpaying households that produce
agricultural commodities and/or overcharging households that buy food commodities for
consumption. These two phenomena reduce incomes of agricultural households and food
access for households that depend on the market as a source of food, exposing them to food
insecurity.
4. Volumes (quantity)
If there is a regular supply (volume) of staple food crops and livestock products entering the
market, then there will not be shortages of food crops in the markets. This is good for food
availability. If, however, the quantity of food entering the market falls below the usual
average, then prices can increase, reducing the amount of food that households can access.
5. Product quality and variety
If the quality of food in the market is poor or below acceptable standards, which could have
nutritional implications for households and particular members of households, then
households are not able to consume the right amount of food with the required composition
of nutrients for productive health. If food varieties are limited or different from the types that
are preferred or typically consumed in some parts of a country, then households that do not
access the food they prefer or a variety of nutritious foods will be affected.
6. Distribution within market
If there are regular supplies to different markets in the country, then access to food to all
areas including those with vulnerable populations increases welfare. Market performance
requires having some benchmark measurements from which comparisons can be made in
order to judge deviations from what society considers normal. Thus, determining market
performance is subjective. For example, when would a price be fair? And fair to whom? For
example, a trader who charges a higher price than the cost for a given quantity of a
commodity can say that the market is performing excellently yet the consumer who pays the
higher price can say the market is performing poorly.

Task 1.2.13: Consider one agricultural commodity in your area and analyze the performance
of the market.

1.2.5.2 The S-C-P paradigm

The S-C-P approach thought that an industry‟s performance (its success in producing benefits
for consumers) depends critically on firm conduct (the competitive behavior of firms in the
market). If firms have the most market power or competition amongst firms is nonexistent,
then market outcomes would be worst for consumers. Moreover, firm conduct depends upon
market structure. Collusion is more likely to occur when the number of firms in the industry
is few, and there are barriers to entry into the market. In addition, when there are many firms
in a market, and firms are free to enter, firms in the industry are more likely to compete with
each other. Hence, structure determined conduct and conduct determined performance
(Structure  Conduct  Performance). However, this implies that structure determined
performance.

The S-C-P paradigm believed that the relationship between structure and performance
through conduct was a stable, cross-industry relationship. Thus, through an examination of
the structure of markets and the organization of firms, economists could explain differences

40
 in market outcomes. Accordingly, the practice of IO at the time became one that derives the
relationship between structure and performance empirically.

The objective of the S-C-P empirical investigations was to establish the cross-industry
relationship between market structure and market power. A typical S-C-P study involved
estimating an econometric model of the form:

𝑀𝑎𝑟𝑘𝑒𝑡𝑝𝑜𝑤𝑒𝑟𝑖 = 𝛼0 + 𝛼1 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒𝑖 + µ𝑖

The 1940s and 1950s witness a vast array of S-C-P studies attempting to document the link
between market structure and market power. Many research outputs established a positive
relationship between seller concentration and industry profitability. This stylized fact gave
support to the view that an industry in which there was more than one but still just a few,
large firms was indeed close to monopoly. S-C-P researchers interpreted these finding to
mean high concentration caused market power. This result suggests that perhaps a firm‟s
mere size, if it is sufficiently large, could imply a legal offense against antitrust law.

1.2.5.3 Criticisms of the S -C-P paradigm

The S-C-P paradigm formed the core of studies in IO for the most part of the early to mid
20th century. However, the challenge began in the 1970s. During this period, researchers in
the field of IO found that the S-C-P paradigm had two important shortcomings. These are:

1. Correlation is not the same as causation

While S-C-P researchers found a positive correlation between concentration and profitability,
their findings is subject to different interpretations. What does it mean when we find a
positive correlation between concentration and market power? There are two main
hypotheses here:

i. The differential collusive hypothesis - Firms with larger market share have more ability to
affect market outcomes, and thus greater market power. In this case, higher concentration
causes market power.
ii. The differential efficiency hypothesis - More efficient firms may have lower costs and thus
gather greater market shares; and, as a result make higher profits. In this case, both higher
concentration and larger profits are both due to cost advantages from larger firms.

In general correlation does not imply causation and the empirical model through which the S-
C-P paradigm conducted its analysis could not distinguish between these two competing
causal hypothesis.

2. Market structure is endogenous

What was really unsatisfactory about the S-C-P approach was that in considering its middle
link - firm conduct - little or no attention was given to strategic interaction amongst firms.
However, in order to assess market power, beyond the market configuration of the industry‟s
existing firms, we also need to consider conduct - in particular the ability of new firms to
enter the market.

Firms may be forced to compete for price, even in a highly concentrated industry, if new
firms are ready and able to enter and compete away supra-competitive profits. Moreover,

41
incumbent firms can pursue strategic actions meant to influence the entry decisions of
potential competitors.

Market structure is itself an endogenous outcome of conduct. That is, structure and
performance are jointly determined together as the result of strategic interaction amongst
firms.

Task 1.2.15: From your knowledge of econometrics discuss the problems that the
endogeneity of market structure creates in regression analysis of market power?

Summary

In Subtopic 2 various approaches to agricultural marketing studies have been discussed.

These are the functional, institutional, commodity, behavioral and S-C-P approaches. The
functional approach looks at the different marketing functions including exchange (selling
and buying), physical (storage, transportation and processing) and facilitating
(standardization, financing, risk-bearing and market intelligence). Institutional approach is
the second very common approach to studying marketing which emphasize on who is doing
the market function. It identifies the organizations and middlemen that perform the marketing
activities. These are what the agricultural producers often call “parasitic middlemen”. This
middlemen are classified as merchant middlemen (retailers, wholesalers), agent middlemen
(broker and commission men), speculative middlemen (buy and sell on their own account but
expect profit made from price movement), processors, manufacturers and facilitators.

In the commodity approach, we only consider one product and analyze the marketing
functions and the institutions in the marketing of the product from the producers to the
consumers. It is useful to the person who is interested in only one product since it does allow
in-depth analyses. Its disadvantage, however is that it ignores the between product and
market alternative and also multi-product firms. However, it is not common to see marketing
firms handling only one commodity.

A more recent approach to emphasize the system of marketing, dwelling on the interaction of
subsystems rather than on individual function or firms is the system approach. This
behavioral system allows systems to be identified with the particular problem being
addressed. Systems type include input-output, which identifies motives and means of
affecting the input–output ratio. The obvious disadvantage of this method is that it is abstract
in nature and the reliance on intimate knowledge of individual‟s firm characteristics and
behavioral interactions. Such data and on intimate knowledge is seldom available.

The last approach is the structure-conduct-performance approach. This approach evaluates

the ultimate performance of the marketing system by examining the level of competition
existing in the industry. The industry structure, including the number and size of firms, is
combined with firm conduct, the pricing behavior, advertising and product development to
denote a performance that can be evaluated as good or bad. This approach has been used
extensively by government regulatory agencies to achieve competition and avoid the evil of
monopoly power. However, the lack of precise norm against which to judge performance has
caused a minimal use of this approach by economists studying marketing.

Exercises

42
1. Discuss the advantages and disadvantages of each of the approach to agricultural market
performance analysis.

2. Given the following percentage concentration measures in two different industries (A and B)

Table 1. Percentage concentration measures in two different industries

Number of firms by size % A B

The largest 4 4 40 60
The “ 8 8 70 80
The “ 12 12 90 84
The “ 20 20 100 90
Total enterprises number: 20

a. Draw up the concentration curves for the two industries (A and B) and arrange them in
accordance with the concentration degree.
b. If we use the concentration index of the largest 4 and 12 enterprises of each industry, what
would the order (as per concentration degree) be reached? What don‟t index desirable
properties comply this measure?
c. Draw up the concentration curve of an industry involves a number n of enterprises with the
same size (and sales). But it might go up when a new enterprise break in, so they don‟t meet
all the Hannah and Kay criteria. Accordingly, it gives rise to a serious problem. Therefore
this index has to be cautiously used. Comment.

3. Given information on Table 2 answer the following questions:

a. Comment if the concentration degree in this industry seems to you low or high and why.
b. Arrange the indicated industries with an asterisk according to its concentration degree by
using RC5 and the inverse of the producers‟ number. Do the results coincide? Explain why
and what of the two measures seem to you the best.
c. In case you could draw the concentration curves of these industries, do you think that any of
these would cross each other? Give some examples and argument your answer.
d. The Herfindahl index measures the concentration in the industry.
e. In the light of the data what would you tell about the relative size of the sixth enterprise of the
sugar sector?

Table 2. Industries (four digits) highly concentrated in the manufactures, United Kingdom

Concentration Producers
Items
Ratio Total Number
Group 1 (C5 > 95%)
Sugar 99.9
Margarine 100.0 (7) 7
Gin - 9
Cigarettes 100. 0 (7) 7
Other Manufactured Tobacco 98.8 8
Petroleum Derivate 100.0 (7) 7
Hydrocarbon Derivate Halogens 99.9 9
Asphalt 100.0 (7) 7
Additives For Liquid Combustibles 95.1 28
And Oils
Telecommunication Wires 95.3 14

43
 Telegraph And Telephone Installations 98.9 13
Tractors 95.7 11
Cars 98.2 20
Aeronautic Industry 100.0 (7) 7
Artificial And Synthetic Fibers 95.4 14
Tires And Air Chambers 96.4 8
Group 2 (C5 > 90%)
Cornflakes For Breakfast 91.4 16
Ice Creams 90,9 29
Crisp 94.7 10
Pets Feed 94.4 39
Coffee 90.6 20
Synthetic Rubber 91.9 12
Roller Bearing 92.4 15
Batteries And Accumulators 90.8 19
Internal Combustion Machinery 91.4 20
Tins And Cans 91.5 57
Cement 93.0 10

4. Consider the market for coffee. You know that there are numerous firms in the market, all of
which are relatively small. Assume further that there are no entry costs that cannot be
recovered on exiting the industry. Suppose that a health fad emerges that encourages the
consumption of natural coffee. What will be the effect on profits of coffee farmers, the price
of coffee and output in both the short-run and the long-run? (Assume that input prices are
constant over the relevant range.)

5. One of the “organizing frameworks” for ideas in Industrial Organization is known as the
Structure-Conduct-Performance framework. In brief, this theory suggests that the structure
of an industry determines its conduct, and the structure and conduct together determine
performance.
a. Define “structure”, “conduct” and “performance” and provide examples to illustrate your
definitions.
b. Provide one example of an economic model of an industry that fits well with the structure-
conduct-performance theory. Explain clearly why the model does fit the theory.
c. Provide one example of an economic model of an industry that does not fit well with the
structure-conduct-performance theory. Explain clearly why the model does not fit the theory.

6. What role do “barriers to entry” play in the Structure-Conduct-Performance theory? Explain.

7. Perfectly competitive firms sometimes earn substantial amounts of profit. Is this inconsistent
with Structure-Conduct-Performance theory? Explain.

8. Is a monopoly industry necessarily bad for consumers and the economy, as the Structure-
Conduct-Performance framework would seem to suggest? Give examples of situations in
which a monopoly might not be a bad thing.

9. Imagine that the government has the choice of having an industry be a pure monopoly, or
having it be dominated by one big firm but with a competitive fringe of smaller firms. Which
one will the government choose, and why? In particular, in which type of industry will there
be larger consumer surplus?

44
10. Assume that you are the owner of a large farm and you hire a top manager to manage the
farm.
a. Why might you link the pay of the manager to the size of the farm? If you did, what measure
of size you would use?
b. Why might you think the pay of the manager to the profit of the farm? If you did, how would
you decide what the link between the profit and the compensation should be?
c. Which one of the above two explanations is consistent with the empirical evidence? Explain.

References
“An Economic Analysis of Coffee Marketing in India” M. Indira. Ph.D Thesis. University of
Mysore.
“Game Theory” Wikipedia, last modified 9 July 2010
http://en.wikipedia.org/wiki/Game_theory
“Policy Issues in the Structure, Conduct and Performance of Banana Market in Anambra State,
Nigeria,” DO Enibe, SA Chidebelu, EA Onwubuya, C Agbo, AA Mbah, Journal of
Agricultural Extension, Nigerian Association of Agricultural Extension, December 2008
http://ajol.info/index.php/jae/article/view/47048
“Market Structures,” Wikipedia, last modified 20 June 2010.
http://en.wikipedia.org/wiki/Market_structure
“Structure-Conduct-Performance and Food Security”
http://pdf.usaid.gov/pdf_docs/PNADL965.pdf http://ageconsearch.umn.edu/handle/47883
“The Development of the Functional Approach to the Study of Marketing to 1940”
http://faculty.quinnipiac.edu/charm/CHARM%20proceedings/.../160%20faria.pdf

45