Food Industry Market Structure Analysis - Research Paper

Abstract

This research article aimed at analyzing the food industry and its market structure. The main questions for this article were the types of market structures that currently exist and which one of them matches the food industry. Methods used during this research were direct interviews from the sellers and consumers as well as market experts, questionnaires, market observations, and originally published articles. From the research methods, it was concluded that the food industry has a perfect competition market structure due to the easy entry and exit, large numbers of buyers and sellers, and the existence of homogenous products (Hovenkamp & Shapiro, 2017). The resultant data was presented both graphically and in tables form. Comparisons were made between these sets of data and those from other forms of market structures and other industries. A conclusion was made that the food industry could be categorized under perfect competition due to the existent of the various sellers and buyers, the homogenous products, and the free market entry.

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Introduction

A market structure is the categorization of the main features of a market. There are four categories of market structure. Namely, the perfect competition, oligopoly, monopolistic competition, and the monopoly market structure (Hotz & Lovel, 2017). Perfect competition is where there are small scale sellers who compete amongst themselves, and price setters are individual firms (Bushnell et al. 2018). The monopolistic competition differs from the perfect one in that the products sold are never homogenous, and the price setters are the sellers. In an oligopoly, the buyers are more than the sellers, and the firms compete amongst themselves, there are barriers to market entry, and the consumers are the primary price-setters (Hong & Li, 2017). A monopoly has only one seller controlling the entire market. The food industry could, therefore, be categorized under perfect competition due to the existent of the various sellers and buyers, the homogenous products, and the free market entry.

Background Information

A market structure is usually determined by several individual characteristics of the general market. A single firm cannot control the entire state of the market; for this reason, some firms decide to partake in horizontal and vertical integrations (Ma et al. 2018). Horizontal integration involves conducting a study on the competitive market and buying up the most competitive, or rather, merging with the competitive firms. Horizontal integration also involves capacity building (Ahn, 2019). That simply means adding resources and expanding the firm. Vertical integration involves the purchase of resources that come in the end or at the beginning of the market chain.

Vertical Integration

This form of integration is advantageous in the sense that there is always an assured source of supply during the so-called dry seasons (Shubik, 2016). That is because integration allows the purchase of resources coming at the end or beginning of a chain. During certain occasions, this form of integration allows synergy (Akhmetzianov & Kosachev, 2016). Synergy is when assets are combined and managed as a whole. That is because their sections are worth less than the integrated sections. However, there are some downsides to this form of integration. Some of which include management of resources in fields where there are no skills.

Horizontal Integration

This form of integration involves merging and capacity building. When the growth opportunities of an industry or firm have limited, the urge to generate more income still exists. That leads to the business managers expanding by the purchase of other firms with no growth limit. Most investors loathe the idea of income pays in the form of dividends. As a result, they resort to invest their income in other firms with existing experience and that similar share objective. This way, their firms get to expand in terms of capacity and finance (Hong & Li, 2017). Other forms of integration include specialization (Zeller & Dreshcher, 2017), where a firm focusses on one product. For instance, KFC fast foods. This form of integration is often very successful. Another form of integration is diversification (Collin et al., 2018). Diversification involves taking part in different kinds of operations. It is said that pitting one's eggs in one basket might lead to a great downfall (Scherer & Ross, 2019). Decentralization where the buyers and the sellers gather to agree on a common market price. The price is mostly determined by product demand and supply. Cooperatives are also a form of integration where operations are done on common grounds, referred to as pools.

Perfect Competition Market Structure

In a perfectly competitive market, profit is maximized when the profit is equal to the marginal cost (P=MC). At the optimal point (Farboodi et al. 2017), which is the equilibrium, at the first-order condition (FOC), the change in price concerning the change in quantity( p/q)which is equal to change in total revenue(TR) concerning the change in quantity (Q. Thus, subtracted from a change in total cost(TC) concerning the change in quantity (TR/Q - TC/Q). The change in total revenue (TR) results in marginal revenue (MR), and the change in total cost (TC) results in marginal cost (MC). Therefore marginal revenue (MR) is equal to the marginal cost (MC). Therefore MR=MC. If MR=MC, then MR=P and P=MC, which is at equilibrium (Hong & Li, 2017). In the short run, the firm is in equilibrium when it maximizes its profits, defined as the difference between total revenue and total cost (Thisse, 2019). The total revenue (TR) is given by multiplying the price by quantity (P*Q).

Change in total revenue (TR) concerning quantity (Q) gives us the marginal revenue (MR), which is equal to price (P). (MR=TR/Q=P) whereas the average revenue (AR) is given by total revenue (TR) divided by quantity (Q), which is also equal to P and, therefore, P=AR=MR.

The SMC curve cuts the ATC at its minimum. At equilibrium, MR=MC and the slope of MC are greater than the slope of MR. The above mathematical expressions are a representation of how the perfectly competitive structure works (Haaland & Venables, 2016). The food industry falls under this category due to the existent of the various sellers and buyers, the homogenous products, and the free market entry.

Characteristics of Perfect Competition Market Structure

Large Numbers of Buyers and Sellers

The food industry has a large number of buyers and sellers in that the effect created by an individual is almost unnoticeable. For instance, soft drink processors have a large number of consumers (Cotterill, 2019). Soft drink manufacturers within a given state are usually too many. Under such given circumstances, one customer cannot influence a price change or product feature. Another example of a food industry that is flooded by buyers and sellers is the sugar processing firms (Daughety & Reinganum, 2018). Sugar is a regularly used commodity and, therefore, frequently purchased. That is matched by establishing a lot of processing firms so that the demand does not supersede the supply. That is due to the ratio of their input compared to that of the entire market (Bertoletti & Etro, 2017). On the flip side, one product seller cannot decide on price changes or the amount of product. The food industry could, therefore, be categorized under perfect competition due to the existent of the various sellers and buyers.

Homogenous Products

The food industry has a lot of stiff competition, and therefore every seller tries to produce similar products (Goten et al. 2017). That enables the buyers to be fair and not to prefer the products of one seller over the rest. This encourages a healthy competition such that a seller stands out based on the quality of their products (Economides & Salop, 2018). Agricultural industries, for instance, maintain their competitive edge by how long their products could last and how fresh they are after production (Cotterill, 2019). Other industries, such as table salt manufactures, produce reproducible products. In this kind of situation, the buyer would prefer the one with the lowest selling price (Dhingra & Morrow, 2019). Fast food industries are also the perfect illustration of similar product production (De et al. 2018). All fast food industries produce the same kind of food and only differ in terms of the service they offer the customers. The food industry could; therefore,t be categorized under perfect competition due to the existent of similar products in the market known as homogenous products.

Free Market Entry and Exit

This feature majorly affects the sellers. The government usually controls the market system in that it states certain rules are regulations that limit free entry and exit into the market system. These regulations are mostly managed by huge investments such as employees and large capital. That makes it difficult to exit at any time of choice (Mahoney & Weyl, 2017). The food industry does not have such control laid on them by the government. An industry may suffer huge losses and be forced to begin from scratch (Parenti et al. 2017). There are no restrictions during such situations; the seller is free to quit or exit the industry and join any other preferred industry (Hong & Li, 2017). Most sugar processing companies have collapsed before due to accusations of poor quality products, and they shut down operations (Mayhew, 2016). This kind of free entry and exit policy is effective due to the large existing number of sellers so products can never run out. Whenever a food processing industry collapses, several existing such industries would continue to offer the same kinds of services (Behrens et al. 2018). The food industry could, therefore, be categorized under perfect competition due to the existent of the various sellers and the free market entry.

Perfect Competition Among Buyers and Sellers

Perfect competition, as a market structure, allows healthy or rather a perfect competition between the buyers and sellers. Food industries have embraced that culture because they share in this kind of market structure (Ciliberto et al. 2018). The buyers are always at liberty to alter prices based on the market formation, and the buyers are also free to make bargains according to the cash at hand (Blaskova, 2016). An example is the maize flour processing industry. Prices do change depending on maize supply by the farmers and consumption (Gilbert, 2017). When the supply reduces, the price of flour shoots up by a reasonable price range, and when the supply is much, the price reduces. The food industry could, therefore, be categorized under perfect competition due to the existent of the various sellers and buyers, the homogenous products, and the free market entry.

Disadvantages, Profitability, and Reality of Perfect Competition

As much as perfect competition has all these positive impacts, there are the downsides. Lack of innovation is one of the disadvantages (Mahoney & Weyl, 2017). There is this healthy competition established such that the product producers are in their comfort zones. That blocks the way of innovation because nobody thinks of stepping out of their way to curb competition. After all, it does not exist. The other shortcoming that exists within the perfect competition is the fixed profit margins (Thisse & Ushchev, 2018). Cost is usually determined by demand and supply rates. That creates insignificant adjustments in the realized profits. He...