Hi everyone, welcome back for lecture three. This is the first lecture for chapter two. We will kick off starting with again our key terms. So really focused on law of demand, law of supply here. market models.
So we'll talk a ton about different types of market models and all the things that go along with that. So I have this video linked in a different Under the modules for this week, so please go ahead and start watching this. This is the first thing that I would like you to go watch. It's a short YouTube video about Andrew Carnegie, how his monopoly kind of got started and everything like that.
So please go ahead, kick off with that and then come back and we will continue on with chapter two. So leading off of our discussion that we talked about in chapter one with selling and buying and procurement and merchandising and everything like that, marketing is all about decisions, which makes sense, right? Our sellers have to decide.
what to produce, when and where and how we're going to sell it, what we're going to price it at, how to deal with dissatisfied customers, and so much more. But on the flip side, buyers have to decide what to buy. And if you're a commercial buyer, where you're really concerned with procurement, you really have to figure out what, when, where, and how you're going to buy it. How are you going to price it?
Because maybe now you have buying power and how are you going to deal with those dissatisfied customers? So the competitive environment is everything that happens within this market. So marketing occurs obviously within a market and we define that as all the possible buyers and sellers of a product or a commodity. So firms in the market may be buyers, they may be sellers, they may be both. And all interactions typically contain both.
They may involve only firms, which is where farmers sell wheat to elevators, may include both firms and consumers, like a retailer and a grocery store, things like that. And we define consumers as the final buyers who buy to consume. So just because a commodity is bought and sold four different times before it reaches its final destination, not every...
Everybody that buys it along the way is a consumer. A consumer is where it's finally going to be consumed and not be resold again. And then we define an industry as a set of competing firms.
So I'll talk a lot about the livestock industry, the meatpacking industry, the feedlot industry. So it's all feedlots within that industry, all meatpackers within that industry. And this is an important slide. So talking about our market models of competition, we're going to divide it into two different types.
One is going to be perfect competition and two is going to be imperfect competition. Imperfect competition is an umbrella that includes monopolistic competition, oligopolies, and monopolies. We will talk about each of these in way further detail in this chapter.
So really, we start on the left end of the spectrum with perfect competition. Perfect competition, very few firms actually fit into perfect competition. Like this slide says, most firms are kind of here, where we fit into monopolistic competition, maybe even bridge into an oligopoly.
But most firms are fitting into some sort of monopoly. type of competition. Then we have monopolies all the way at the right side of this.
So remember that firm competition, we're going to call this a spectrum more than an absolute. So this is really a spectrum of what degree do they fall onto, not an absolute typically. So starting off with perfect competition. Perfect competition is all about a competitive market that's made up of many competing firms, each of which is too small for its independent decision to influence the market. a way perceptible to the firm.
So think about firms in perfect competition. They're really just like drops in the bucket. So in perfect competition, all firms sell the same commodity. Back to chapter one, those lectures, I mentioned a homogenous product when we were talking about micro-marketing. That homogenous product means that It doesn't matter if it's from farmer A, B, A through Z, they're all going to be the same.
Easy entry into and exit out of the market as prices change. So to raise corn, if you decide one day you up and want to be a corn farmer, there's no secrets to growing corn. You can get in or out of the market. market relatively easily. This isn't always true though.
So when we get away from perfect competition, you can't just start producing Dr. Pepper because you don't know the secret recipe with the 23 ingredients. Large number of buyers and sellers. This is a really important element of perfect competition.
Lots of buyers, lots of sellers. Perfect information, again, kind of like the easy entry and exit into and out of. There's no secret recipe.
With perfect information, you can find a lot of resources typically available for that commodity or anything like that. So Texas A&M University AgriLife, things like that. A&M AgriLife. life has so many resources for farmers and that leads to a lot of this perfect information here and then firms are price takers that means that when they're selling their good they don't have a ton of control and or they don't have really any control and what they price the good at they have to take what the market is willing to pay them because there's so many sellers that if they don't you can't set your price If a buyer doesn't like the price that you give them, they're just going to go to the person down the road. So firms in perfect competition are subject to the price that the market is willing to pay them.
So again, to just reiterate that, a price taker means that it's a market participant, and this can either be on the buyer or seller side, that sells such a small part of the market's total. But its most important decisions revolve around responding to price levels with appropriate decisions about output. So we don't care necessarily, we can't control what the price that we're going to sell it at, so we control how much we produce. And that's our main decision.
So competition among firms under perfect competition is primarily cost based. So if we can't control the price that we sell it at because there's such a small drop in the bucket to the market and we really care about output, we ultimately are competing against other firms to minimize our costs when we're a price taker because we can't set our prices to get a higher price. So we're subject to what we get.
It's kind of like a get what you get kind of situation. So if we can only get what we get for a price, we have to control our costs. And that's why it's cost-based competition.
So consequences of perfect competition. With perfect competition, we have a horizontal demand curve for an individual producer. So this almost always gets misconstrued, but I want to talk about about it because it's really important. So we're going to have a case study for chapter two that's all about supply and demand and we'll talk about it later in this chapter.
But hopefully supply and demand is a review for you. So our price is always going to be on the vertical axis. And quantity is always going to be on the horizontal.
A typical demand slope is downward sloping. So reiterate, underline, highlight, whatever you need to do for an individual producer. So what that's going to look like is an individual producer's demand curve is going to be horizontal.
What that's saying is if the price of corn is $5 per bushel, it doesn't matter if farmers... A sells 100 bushels or if they sell 500 bushels, they're a price taker of $5 at either quantity because whether they're selling 100 bushels, 500 bushels, 500,000 bushels, that's such a small drop in the bucket of the market because there's so many producers that their individual decision isn't going to change what's going to happen for everybody else. So horizontal demand curve for an individual producer.
Make sure you read the exam questions well. Make sure you understand this concept. If you don't, please let me know.
Individual demand curve for an individual producer. And it all is because they are price takers. If we weren't price takers, then we wouldn't have to worry about this.
So ultimately, our major marketing decision under perfect competition is how much to produce and how we're going to market it. Just meaning that, do we want to sell it to a co-op? Do we want to sell it directly to a feedlot? Things like that. We have an incentive to lower costs, remember, because we're cost-based competition, and ultimately that would lead to us improving our operational efficiency.
We're independent decision makers, so my decision doesn't affect Farmer Joe down the road. We're independent decision makers, and we don't advertise. We don't advertise because farmers typically don't engage in micro-marketing activities. Because we have homogenous goods with cost-based competition. If I decide to advertise for corn that's exactly the same as Farmer Joe down the road, the only thing I'm doing by advertising is effectively increasing my expenses.
I'm not going to get more for my product because somebody else can go, that buyer can go to somebody else and get the exact same product for cheaper. So no advertising. Imperfect competition. Remember, perfect competition and imperfect competition are two different structures. So with imperfect competition, we have differentiated products and services.
So now we no longer have homogenous. goods. We're differentiated. Things are slightly different.
That means and now we have the power to set our prices within limits. Remember that within limits is important. I can't sell from Like I probably can't sell a whole lot of cheeseburgers at a million dollars a piece. So that within limits has to be reasonable. So firms can set prices or negotiate it with those on the other side of the market.
Those firms are now called price setters, price searchers, price makers. All of those are used interchangeably. Very different idea than a price taker.
So an example of imperfect competition would be HEB as a seller. So this would be with their procurement program. So they negotiate with different companies on their purchase price because they have such large buying power now. So moving on from perfect competition, moving rightward one on that spectrum we talked about. So we go from perfect competition now to monopolistic competition.
So when a market has many different firms and each is competing to sell a product or service that is somewhat different. Now we have monopolistic competition. That somewhat difference is important because now we have product differentiation. When product differentiation exists, buyers perceive significant differences among the products or services offered by various sellers.
This can be brand, quality, services, location, etc. One of the... biggest things with monopolistic competition is talking about typically fast food.
So fast food industries are going to be very common here. If you while I was talking about this monopolistic competition, we're thinking about like lanes versus is Cane's that's absolutely fitting into this. So it's almost, I mean, they both serve chicken strips and french fries, but people are like diehard Lane's or diehard Cane's people.
I personally fit a little bit more into the Lane's side of preferences, but it's because of my perceived quality. So with monopolistic competition, there's many sellers. So that's still the same characteristic of perfect competition, many sellers, but now we have differentiated products. So that's one difference.
Our differentiated products, they're no longer homogenous. And this can be done through brand. So like brand recognition, things like that. Luxury brands versus ordering off at Amazon.
Quality. Maybe you perceive quality associated with a certain brand of vehicle or things like that. Chick-fil-A fits in with their services.
Location. Starbucks things like that relatively easy entry but high capital costs so most of the time It's relatively easy to franchise like a fast food restaurant, but you really do have high capital costs associated with that. We're going to have relatively elastic demand curves because there are numerous substitutes.
When we're talking about a relatively elastic demand curve, what that's going to look like is it's going to be relatively horizontal. So a way I like to remember this is that if we have a graph, if you draw an E, that's going to be an elastic demand curve. If you draw more of an upward, an I. that's going to be an inelastic demand curve. So this is going to look more like an E.
So we have an elastic demand curve. And the reason behind this is saying that there's so many substitutes. Sonic doubles the price of their cheeseburger. Well, there's so many substitutes that you can go get to replace that Sonic cheeseburger.
It's not, there's just so many substitutes. It's not, Sonic doesn't have this perfectly inelastic demand curve where they're the only place that makes cheeseburgers. And we do have some influence on price, mainly due to brand loyalty. So if you've noticed lately, if you go through the Chick-fil-A drive-thru, their prices, relatively, I mean, they're not the cheapest fast food around, but there's such a level of quality and service and brand loyalty associated with Chick-fil-A that you definitely have some influence on price. So for firms involved in monopolistic competition, your strategies you're going to do include differentiation.
This is how is your product slightly better? How do you get the edge above the competition? Packaging, branding, credit, service, etc. All of those things are going to influence when a buyer decides to go with you. You might be asking, what about the credit thing?
That's a little weird, right? Well, credit is involved with like financing companies, things like that, or certain, it's especially gotten popular lately. Maybe you order from a company that offers Afterpay or Sezzle or something like that, because that's a credit differentiation. I don't know. amongst them versus another company.
So maybe you would go with them as opposed to another because they offer that type of credit. Same can be said with agricultural machinery firms and things like that. So examples of monopolistic competition are going to be like McDonald's and Whataburger and Burger King, Sonic, all of those. Coke versus Pepsi, Green Giant versus Del Monte, even a co-op versus an independent farm store.
So this could be like supply versus producers or things like that. So slightly differentiated based on the things that they offer but relatively under the same umbrella of products. So moving on, we're going to power through this lecture.
Moving on to the next option on the spectrum, we have an oligopoly. So an oligopoly is where our marketing competition is made up of a few fairly similar sized firms, and they're going to be called an oligopoly. The characteristics of an oligopoly are going to be non-price rivalry.
So this is things that you change about the product that aren't necessarily changing the price. Mainly product differentiation of how can you tweak your product. to make it different or stand out from the competition and advertising especially but one thing we haven't talked about yet is this interdependence of firms so in an oligopoly typically an oligopoly is going to be four firms or less, that oligopoly is going to be interdependent, saying that one of the policies of one firm affect other firms. So unfortunately, if you've had to deal with game theory or anything like that, this is what that's talking about. So if the price of or if one company decides to undercut the price of their product, that's going to affect the other firms in the oligopoly.
With an oligopoly, there are substantial barriers to entry. So for an example, and one of the most popular examples of an oligopoly is the beef packing industry. So there's four major beef processors.
You're free to become a beef processor yourself. But to be able to build a processing plant, you're going to have to raise millions of dollars. especially if you wish to be competitive in terms of costs. And because those four existing firms really do meet market demand, there's not a lot of room for another firm. So it's going to be challenging to navigate that structure.
Ultimately, that's going to lead to a development of a hierarchy of leaders. So because there's interdependence, we're now going to end up with what's called a price leader. So usually some firm within the oligopoly leads with a price change.
And all the rivals in the industry are going to quickly follow suit of that. One, there are options with game theory of, well, what if I leave my prices low and get more of the market share and things like that? But typically, we're going to end up with a hierarchy of leaders.
And first and foremost of those is going to be the price leader. So an oligopoly is on the selling side of things. But the purchasing competition among a few firms is called oligopsony.
So think selling oligopoly, buying oligopsony. So that's a little confusing, but we're talking about everything with the main structures in terms of the selling side. Next is our lovely monopolies.
So while we're not talking about the game, ultimately we're talking about a monopoly is a one seller or a monopsony is one buyer. So there's a handful of different sources. and how we get to the structure of actually having a monopoly. One is the sole source of a raw material.
So if you are the only person that sells or has access to this material, you're inherently going to have... a monopoly. Another is a patent.
This patent is extremely popular with like medical things and stuff like that. So an EpiPen patent or anything like that is going to lead to sources of monopolies. Again, economies of scale.
We talked about economic incentives with middlemen as a why economies of scale exist, but economies of scale are when companies are so large that they're able to better divide. out their fixed costs amongst units. So they end up with an average lower, a lower average total cost per unit of that good.
If they're so competitive in terms of cost, it's really challenging to combat that and be competitive and succeed in terms of business. And then governmental action. There's a handful of governmental... created, if you want to call it, monopolies due to things like that exist with governmental action. So when we think of monopolies, we start to think of antitrust lawsuits and things like that.
Google, Meta, companies like that, they have had multiple different antitrust violation lawsuits because they're so large that they control so much. And then Meta is constantly in and out of antitrust lawsuits as well. So with monopolies, the USPS is actually a government-created monopoly because of the structure to provide this service to the national constituents.
Next is a technological monopoly. If you watch a lot of football, like we do in our household. NFL actually has copyrights of lifetime plus 70 years on any of their things that they produce.
So you hear it in the beginning of a game or anything like that. So the next time you're watching football, be on the lookout for that. technological monopoly and it would be extremely hard for somebody to come in and compete with any sort of structure that NFL has competed. Another would be a geographic monopoly. Hopefully none of you have ever been stranded in the middle of nowhere.
without any gas. But if you notice, typically when you're out in the middle of nowhere, there's not a lot of competition. Gas prices tend to be extremely high. Well, due to geographic constraints, that's a geographic monopoly. And then another with natural monopolies, this is typically utility companies because startup costs are so expensive.
You may only have one option for utilities and it's due to the cost to build and... infrastructure necessary to support a utility company and have them actually function. So when we're comparing different types of market models, this table is super important and hopefully it will help you in terms of understanding and comparing the different things.
we've talked about. So with market models, perfect competition, we have homogenous goods, many buyers and sellers, easy entry and exit, and our market strategy is really timing or who we want to sell to. But as we move rightward along that spectrum, a monopolistic competition, now we have differentiated goods. There's so many buyers and sellers. We can still get into companies, but it is a little bit more expensive.
relatively easy entry and exit, but typically fairly high capital investment. And then with our marketing strategies, because we have a differentiated product, now we can set our price. We can focus on brand names.
We can focus on product loyalty, promotion, advertisement, design, packaging, things like that. With an oligopoly, we could have a homogenous good or a differentiated good. Typically, it's going to be more of a differentiated good, but oligopolies could be a homogenous good. If you think of company, like think of things like OPEC.
and things like that. There's few firms, typically three to four or less. It's extremely difficult to enter into an oligopoly type market structure.
And with our marketing strategy, we set our price. If the goods are differentiated, then we can establish brand names, promotion, product design, and packaging. So think of vehicle manufacturers and things like that.
They're going to fit into an oligopoly type situation. And then for a monopoly, we're going to have a differentiated good, most likely patent protected. The number of firms that exists is only one. Remember, mono one legally exists with government rights.
regulation typically. It's almost impossible to enter into a monopoly type situation and monopolies set their price based on marginal cost is equal to marginal revenue and then you go up and read the price off the demand curve. That would have been all the way back in an AgEQ 105 class.
We don't have to worry about it for this one. I'm sure some of you are relieved for that. I don't make you go back to the graphs but just know that monopolies are setting their price in terms of a market strategy.
So we'll stop there, come back, finish up lecture two with the rest of the slides in this chapter. That one, lecture two will be, or lecture two for chapter two will be pretty short and sweet.