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Concentration Ratio (CR4)

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o Proportion of industry sales made by the largest firms (Usually look at top 4) o Government calculates every 5 years o Higher ratio considered less competitive

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Herfindahl-Hirschman Index (HHI)

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o Alternative to CR4 o Calculated by the sum of the squared values of the market shares o Example: Monopoly would be HHI = 10,000

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SIC codes

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o 4 digits o Standard Industrial Classification o Used from the 1930's to 1997

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NAICS codes

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o 6 digits o North American Industry Classification System o 6th digit is for country differences o Started in 1997 o 350 new industries

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DOJ Merger Evaluation

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o Unconcerned: • HHI changes by less than 100 • Market still unconcentrated o Concerned: • Post: Moderately concentrated and HHI up 100 or more o Very concerned: • Post: Highly concentrated and HHI up 200 or more

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Clayton Act

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• 1914 • Prohibits: o Mergers that "may substantially lessen competition" o Exclusive dealing / trying arrangements o Interlocking directorates • Often around 90 cases a year

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Sherman Act

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• 1890 • Prohibits: o Price fixing o Bid rigging o Market decision or allocation schemes • Overseen by Department of Justice o Maximum fine $100 million • Often cases of tacit collusion • Agricultural sector cases have increased

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Robison-Patman Act

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• Prohibits: o Seller from charging buyers different prices for the same commodity o Discriminating in allowances (services / ads) • Overseen by the FTC o Maximum fine: $100 million • Cases are rare

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Antitrust Case: Bananas

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o Dole and Fresh Del Monte fined by EU: • Shared pricing and other information • Formed price-fixing cartel in 8 EU countries • Fines of $82 million

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What happened to Chiquita?

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involved in cartel but admitted wrongdoing, aided investigation

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Antitrust Case: Vitamins

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o BASF and Hoffman-LaRoche: • Charged with conspiracy to "suppress and eliminate competition" • Both human supplements and animal feed - agreed to create 1.4 bill fund for those affected- funds for children

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Antitrust Case: Spices

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o McCormick charged under Robinson-Patman Act- equal treatment must be given to all buyers o Charged with demanding bulk of store's spice section, inflating prices

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Price Fixing

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• Agreement among competitors to raise, fix, or maintain prices • Set pricing formula • Maintain price differences for sizes or types • Eliminate discounts

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Why the increased in ag cases for price fixing?

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-small and decreasing number of firms on pos levels of market - use of contract pricing instead of open market -many trade associations --allos communication

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Kraft Foods

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o One of the largest food companies o Bought by Phillip Morris in 1988 o Kraft stock issued in 2001 • Phillip Morris owned 86% o Phillip Morris renamed Altria Group in 2003 o Altria completes spin-off of Kraft 2007 o 2012: • Kraft Foods splits into Kraft Foods Group and Mondelez (international snack food business) o 2015: • Kraft and Heinz merge • 8 brands with over $1 billion in sales • #3 food company in North America

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Cause Marketing 5th P

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Purpose

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Bid Rigging

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the way that conspiring competitors effectively raise prices where purchasers- often federal, state or local governments- acquire goods or services by soliciting competing bids -competitors agree in advance who will submit the winning bid on a contract

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Bid suppression

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one or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitors bid will be accepted

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complementary bidding

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: "cover" or "courtesy" occurs when some competitors agree to submit bids that either are too high to be accepted or contain special terms that will not be acceptable to the buyer -Most frequent form of bid ridding

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Nabisco

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o National Biscuit Company becomes Nabisco in 1971 o Merges with RJ Reynolds in 1985 • Largest U.S. consumer goods company o Nabisco spun off from RJR Nabisco in 1999 o Bought by Phillip Morris in 200 o Placed within Kraft Foods

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Agricultural Price Cycle

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• Regular, periodic fluctuations in price resulting from changes in production of a product • Runs counter to production cycle o Supply increases, prices fall o Supply decreases, prices rise

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Biological Lag

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o Time between farmers deciding to change production and when market supplies change o Varies by commodity

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Psychological Lag

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o Time prices must be high or low to convince farmers to change production o Prices always fluctuate, don't react to every change

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Seasonal Price Variations

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• Regular price variation within a marketing season • For crops: o Prices lowest at harvest, rising from then • Cost of storage main factor o More expensive - bigger price raise o Paying for time utility • New technologies tend to smooth these

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Price Flexibility

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• Percentage change in price caused by a percentage change in quantity supplied • Inverse of elasticity of demand • More likely to have supply changes • Demand more stable

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Farm and Retail Prices

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• Farm prices more variable • Move together over long-run • Correlation stronger for fresh products

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Price Asymmetry

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• Main concern in farm and retail pricing o Slow retail price response when farm prices fall o Rapid response when farm prices rise o Many studies, many results: differs by commodity, price discovery method, market structure o Pricing efficiency problem

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Food Marketing Bill

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-Government reports this -Total expenditures to food marketing firms for all marketing activities • Largest component: o Labor 46%

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Consequences of labor being a large component to F.M.B

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-incentive to increase operational efficiency- replacing ppl with machine bc of the high labor costs - difficult to lower -bill closely follow labor costs

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Farmer's Share

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• Difference retail price and marketing margin • Differ by commodity due to: o Degree of processing o Perishability o Seasonality o Bulkiness • Meaning: o Cant judge farm prices / incomes or efficiency ---- small share of a large number can beat a large share of a small number

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Farm-Retail Price Spread

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• Marketing margin adjusted by quantity • Difference retail price per unit and farm value of an equivalent amount of food • Example: o Takes more than 2 lbs. of live cattle to produce a lb. at retail

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Marketing Margin

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• Difference between what consumer pays and what farmer receives • "Price" of all food marketing activities • Controversial • High for processed foods and low for fresh foods

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Cost-plus theory

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Retail price built from adding marketing margin to farm price - most accurate in long run

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Derived demand theory

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Farm price left over from retail price after marketing costs paid - most accurate in short run

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Sticky Marketing Margin

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Tendency for margin to stay constant in the short term Why? large labor component, imperfect competition (firms are margin settlers), costs relate more to volume than price

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Foodways

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A group's or societies behavior pattern of acquiring, preparing, and consuming food -Vary from society to society - Can and do change over time -Must watch trends and changes in demographics

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Factors that influence food purchases

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- prices -income -advertising -socio demo -tastes/preferences -attitudes and beliefs

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Bundle of Attributes

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• Consumer purchases a bundle of attributes o All the physical and four utility values they associate with a product

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Consumption ; Expenditures

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Expenditures rising because of: o Rising food prices(inflation) o Preference for more expensive foods o Increased population Slow growth o Maturity industry o Incentive for exports • Income spent on food has decreased (shifting from food to health care and education) no food has a guaranteed market

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Income ; Preferences

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• 6.9% of U.S. income spent on food • Higher incomes mean better diet upgrade diet- sub more expensive foods, not more foods

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Income and preferences pyramid

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as income goes up 1. causes 2. health promoting 3. convenience 4. taste, variety 5. safe, affordable, nutritious

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Engel's Law

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Tendency for share of income spent on food to fall as incomes rise

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Demographics

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• Immigration patterns o Bring different foodways o Introduce new foods o New marketing opportunities • Mobility of population o After distribution network • Regional demand differences o Move to suburbs • Creating of the supermarket o Age of population o Rising education levels • Demand for more label information

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Household Trends

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• Increasing number • Over half only 1 or 2 people • Smaller family size • Female headed • Two incomes • People working multiple jobs • More and better appliances

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Convenience Food

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• Food that requires less time, effort, or ingredients for consumers to prepare o Often criticized o Transfers marketing functions from kitchen to food marketing system o Farmers share smaller

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Away-from-home Market

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• 42.1% of food expenditures • Restaurants are fastest growing food service firms o Fast food: 34% of market • 45-65% of price represents non-food costs • Entertainment value • Farmer's share smaller • Food service has own preferred bundle of attributes

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Amazon ; Whole Foods Update

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• Overall prices have dropped only about 1% o Some items rose in price • Walmart is Amazon's biggest competitor • Whole Foods has generated 1.6 mil in sales through Amazon

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Banned Foods

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unpasteurized milk- protects consumers from harmful bacteria Absinthe- addictive hallucinogen shark fins- removing the fin and dumping the shark back into the oven is illegal foie gras

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Arctic Apple

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genetically altered to suppress browning- Neal Carter

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Gourmet Gas Stations

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• Gas stations are now offering menus with homemade food • Attracts everyone • Restaurants costs millions and gas stations do not • Revenue has increased every year

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retail Food and Non-Food Prices

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• Move together over long-run -Food marketing costs = 75% of retail value -Macro forces affect both • From 1970-1994 o Retail food prices up 268%(inflation) o Other retail prices up 282%

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