Chapter 6: Marketing Efficiency and performance

i)Technical or Physical or Operational efficiency: Efficiency is

increased when the cost of performing a function per unit of output is
reduced.
 Improved operational efficiency is evident where marketing costs are
reduced but outputs are either maintained or actually increase
 Examples of operational efficiency gains would be the introduction
of a less expensive method of storing grain or an innovative milk
package that reduces energy costs when the product sits in retailers'
refrigerators
 Cont….
 A new marketing practice that reduces costs but also reduces
consumers' satisfaction may actually reduce the efficiency ratio.
 E.g., millers might improve efficiency by withdrawing 5 kg bags of
meal from the market and sell minimum quantities of 10 kg bags.
 If a substantial number of consumers prefer to buy the 5 kg bag, then
the decrease in customer satisfaction could be greater than the gains
made in cost reduction to the miller.
 When evaluating any marketing change intended to improve
marketing efficiency, both cost reductions and customer utility must
be considered.
 Cod’
ii)Pricing efficiency: refers to the structural characteristics of the

marketing system, when the sellers are able to get the true value of

their produce and the consumers receive true worth of their money.

 Pricing efficiency is a second form of marketing efficiency and is

based on the assumption that competitive markets are efficient

 The evidence of pricing efficiency is efficient resource allocation

and maximum economic output.

 Frequently there are
Cod’
conflicts between the different varieties of
efficiency.

 For example, a new technological development may improve a

firm's operational efficiency and permit it to grow very large.

 However, this growth may reduce the number of firms and thereby
affect structure and competition in the industry, and in turn perhaps
lower price efficiency.

 The above two types of efficiencies are mutually reinforcing in the

long run, one without the other is not enough.
 Structure, Conduct and performance in agricultural marketing
 Market Structure: The term structure refers to something that has
organization and dimension – shape, size and design; and which is
evolved for the purpose of performing a function.
 Market structure refers to those organizational characteristics of a market
which influence the nature of competition and pricing, and affect the
conduct of business firms;
 Market structure refers to those characteristics of the market which affect
the traders‟ behavior and their performances;
 Market structure is the formal organization of the functional activity of a
marketing institution.
 An understanding and knowledge of the market structure is essential for
identifying the imperfections in the performance of a market.
  Components of Market Structure
 The components of the market structure, which together determine
the conduct and performance of the market, are:
1. Concentration of Market Power: is measured by the number and
size of firms existing in the market.
 This is an important element determining the nature of competition
and consequently of market conduct and performance.
 The extent of concentration represents the control of an individual
firm or a group of firms over the buying and selling of the produce.
2. Degree of Product Differentiation: Whether or not the products
are homogeneous affects the market structure.
 If products are homogeneous, the price variations in the market will
not be wide.
 When products are heterogeneous, firms have the tendency to
charge different prices for their products.
 Cont…..
3. Conditions for Entry of Firms in the Market: Another dimension of the
market structure is the restriction, if any, on the entry of firms in the market.

 Sometimes, a few big firms do not allow new firms to enter the market or
make their entry difficult by their dominance in the market.

4. Flow of Market Information: A well-organized market intelligence

information system helps all the buyers and sellers to freely interact with one
another in arriving at prices and striking deals.

5. Degree of Integration: The behavior of an integrated market will be

different from that of a market where there is no integration either among the
firms or of their activities.
 Cont…..
 Market Conduct: refers to the patterns of behavior of firms,
especially in relation to pricing and their practices in adapting and
adjusting to the market in which they function.

 Specifically, market conduct includes:

(a) Market sharing and price setting policies;

(b) Policies aimed at coercing rivals; and

(c) Policies towards setting the quality of products.

 Cont…..
 Market Performance: refers to the economic results that flow
from the industry as each firm pursues its particular line of conduct.
 Some of the criteria for measuring market performance and of the
efficiency of the market structure are:
1. Efficiency in the use of resources, including real cost of performing
various functions;
2. The existence of monopoly or monopoly profits, including the
relationship of margins with the average cost of performing various
functions;
3. Dynamic progressiveness of the system in adjusting the size and
number of firms in relation to the volume of business, in adopting
technological innovations and in finding and/or inventing new forms
of products so as to maximize general social welfare.
4. Whether or not the system aggravates the problem of inequalities in
interpersonal, inter-regional or inter-group incomes.
 Cont…..
 For a satisfactory market performance, the market structure should keep pace
with the following changes:
1. Production Pattern: Significant changes occur in the production pattern
because of technological, economic and institutional factors.
 The market structure should be re-oriented to keep pace with such changes.
2. Demand Pattern: The demand for various products, especially in terms of form
and quality, keeps on changing because of change in incomes, the pattern of
distribution among consumers, and changes in their tastes and habits.
 The market structure should be re-oriented to keep it in harmony with the
changes in demand.
3. Costs and Patterns of Marketing Functions: Marketing functions such as
transportation, storage, financing and dissemination of market information, have a
great bearing on the type of market structure.
 Government policies with regard to purchases, sales and subsidies affect the
performance of market functions.
 The market structure should keep on adjusting to the changes in costs and
government policy.
4. Technological Change in Industry: is necessitate changes in the market structure
through adjustments in the scale of business, the number of firms, and in their
financial requirements.
  Measures Market of Concentration
 Concentration ratio: is expressed in the term CRx, which stands for the
percentage of the market sector controlled by the biggest x firms.
 For example, CR3 = 70% would indicate that the top three firms control
of 70% of a market.
 CR4 is the most typical concentration ratio for judging what kind of an
oligopoly it is.
 A CR4 of over 50% is generally considered a tight oligopoly;
 CR4 between 25 and 50 is generally considered a loose oligopoly.
 A CR4 of fewer than 25 is no oligopoly at all.
 We would add that a CR3 of over 90% or a CR2 of over 80% should be
considered a super-tight oligopoly.
 The problem with this measure is that CR4 does not indicate what the
relative size of the four largest companies is.
 It may be that a CR4 of 80 means that one company controls 50% of the
market, while the others have 10% apiece.
 Advantages – it is easy to construct and easy to understand.
 Disadvantages - covers only a portion of total market but small size firms
is not covered.
 Cont….
 Herfindale-Hirschman index: A measure of concentration based on the
sum of squares of market shares of firms, expressed as proportions of
total market sales.
 The Herfindahl index, also known as Herfindahl-Hirschman Index or
HHI, is a measure of the size of firms in relationship to the industry and
an indicator of the amount of competition among them.
 it can range from 0 to 1 moving from a very large amount of very small
firms to a single monopolistic producer.
 Decreases in the Herfindahl index generally indicate a loss of pricing
power and an increase in competition, whereas increases imply the
opposite.
 Example: The major benefit of the Herfindahl index in relationship to
such measures as the concentration ratio is that it gives more weight to
larger firms.
 Take, for instance, two cases in which the six largest firms produce 90 %
of the output:
Case 1: All six firms produce 15%, and
Case 2: One firm produces 80 % while the five others produce 2 % each.
 Cont….
 We will assume that the remaining 10% of output is divided among
10 equally sized producers.
 The six-firm concentration ratio would equal 90 % for both case 1
and case 2, but in the first case competition would be fierce where
the second case approaches monopoly.
 The Herfindahl index for these two situations makes the lack of
competition in the second case strikingly clear:
Case 1: Herfindahl index = 6 * 0.152 + 10 * 0.012 = 0.136
Case 2: Herfindahl index = 0.82 + 5 * 0.022 + 10 * 0.012 = 0.643
 This behavior rests in the fact that the market shares are squared
prior to being summed, giving additional weight to firms with
larger size.
 Cont….
• Formula
• where si is the market share of firm i in the market, and n is the
number of firms.
• The Herfindahl Index (H) ranges from 1 / N to one, where N is the
number of firms in the market.
• Equivalently, the index can range up to 10,000, if percent's are used
as whole numbers, as in 75 instead of 0.75.
• The maximum in this case is 1002 = 10,000.
• There is also a normalized Herfindahl index. Whereas the
Herfindahl index ranges from 1/N to one, the normalized
Herfindahl index ranges from 0 to 1. It is computed as:
• where again, N is the number of firms in the market, and H is the
usual Herfindahl Index, as above.
 Cont….
 A small index indicates a competitive industry with no dominant
players.
 When firms have unequal shares, the reciprocal of the index
indicates the "equivalent" number of firms in the industry.
 An H index below 0.1 (or 1,000) indicates an unconcentrated index.
 An H index between 0.1 to 0.18 (or 1,000 to 1,800) indicates
moderate concentration.
 An H index above 0.18 (above 1,800) indicates high concentration.
 Disadvantage: This concentration index is very demanding in terms
of data.
 Cont….
 Lerner index: Another way to show how the elasticity of demand affects
a monopoly's price relative to its marginal cost is to look at the firm's
Lerner Index (or Price mark-up): the ratio of the difference between price
and marginal cost to the price: (p - MC)/p.
 If the firm is maximizing its profit, we can express the Lerner Index in
terms of the elasticity of demand by rearranging
(P-MC)/P = 1/ε
 Because MC > 0 and p > MC, 0 <p - MC < p, so the Lerner Index ranges
from 0 to 1 for a profit-maximizing firm.
 The above equation confirms that a competitive firm has a Lerner Index
of zero because its demand curve is perfectly elastic.
 The Lerner Index for a monopoly increases as the demand becomes less
elastic.
 If e = -5, the monopoly's markup (Lerner Index) is 1/5 = 0.2; if e = -2, the
markup is 1/2 = 0.5; and if e = -1.01, the markup is 0.99.
 Monopolies that face demand curves that are only slightly 'elastic set
prices that are multiples of their marginal cost and have Lerner Indexes
close to 1.
  Market Integration
 Integration shows the relationship of firms in a market.

 The extent of integration influences the market conduct of the firms

and consequently their marketing efficiency.

 Markets differ in the extent of integration and, therefore, there is a

variation in their degree of efficiency.

 Market integration is a process which refers to the expansion of

firms by consolidating additional marketing functions and activities
under a single management.
  Types of market integration
 Types of integration that tie together individual firms are called
horizontal, vertical and conglomerate.
 Theses affect the structure of firms, conduct and hence performance.
 Horizontal Integration: In this type of integration, some marketing
agencies (say, sellers) combine to form a union to reduce their effective
number and the extent of actual competition in the market.
 e.g., Primary milk producers can organize as cooperative union.
 Vertical integration: occurs when a firm performs more than one activity
in the sequence of the marketing process.
 It is linking together of two or more functions in the marketing process
within a single firm or under a single ownership.
 E.g., if a firm assumes wholesale as well as retailing, it is a vertical
integration or processor under taking retailing.
 Conglomeration: A combination of agencies or activities not directly
related to each other may operate under a unified management or
 it refers to the branching out of business firms into other lines of activity.
  Three main types of Conglomeration:
1. Product Extension
2. Market Extension
3. Pure Conglomerate
 Product extension: two or more different but related products are
produced.
 E.g. poultry processing and meat packing
 Market extension: A given product is sold in 2 different market
areas,
 E.g. milk in 2 cities distant from each other.
 Pure Conglomerate: A firm that is engaged in activities that are
unrelated
 E.g. medicine and bread making.
The End of chapter & The Courses!!!

You deserve respect for your behavior!