Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, September 28, 2011

Structure, Conduct and Performance in the South African Potato Processing Industry

Posted by D. Daniel Sokol

J.W. Hanekom, B.J. Willemse and D.B. Strydom (all University of Free State South Africa) address Structure, Conduct and Performance in the South African Potato Processing Industry.

ABSTRACT: The South African Potato industry was deregulated in the early 1990’s, leading to changes in market structure. The adjustment in market structure leads to changes in production and marketing practices, including contracting and pricing strategies for processing firms within the industry. The purpose of this paper is to investigate the current status in the potato processing industry, based on market structure, conduct and performance. The objective is to qualitatively measure the driving forces within the industry, and how these factors influence performance of the industry as a whole. The research method was based on the structure-conduct-performance paradigm, giving a better understanding of the potato processing industry and the driving forces, relating to future growth. A short case study of the Australian potato processing industry, which finds itself in a similar position as South Africa, reveals that increasing global competition in the form of low cost importers, are hampering competitiveness and profitability, along with rising production costs. It was found that the South African potato processing industry has a relatively high concentration, which means efficiency is lacking as market shares is not distributed effectively. It was further evident that a lack of trust between processors and producers is a source of concern for processors.

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Market structure analysis as an orientation for research in agricultural economics
Burgert Terblanche

In research projects involving market structure analysis big business are many times reluctant to cooperate because of the critical attitude of the researchers. Perhaps this critical attitude is inherent in the researcher's thinking in light of his training as to what constitutes an “ideal” market structure. On the other hand I am aware of the fact that the findings of reasonably objective researchers are lifted out of context to support political and legislative action.

In research with a market structure orientation is to receive the support of big business more of the researchers, in my opinion, must emphasize the positive results, to the extent they exist, of the changing structure. By this I do not mean that researchers gloss over the undesirable results, the malfunctions and the inefficiencies. I do think they should make a conscious effort to present the total picture.

I am sure that most agricultural economists interested in market structure research in agriculture have studied rather carefully the paper by Clodius and Mueller on this subject which was printed in the Journal of Farm Economics. This is an excellent article which among other things outlines the limitations and problems in using market structure framework as an orientation to research. His approach was used in a number of AID sponsored studies of marketing organization in developing countries. They are listed in the paper by Barbara Harriss (Queen Elizabeth House, Oxford). She questions their conclusions.

“A question mark must be placed not simply beside the methodology of conventional agricultural marketing economics in the structure, conduct performance tradition, but also beside the history of the interpretation of the results”.

Posted by: Burgert Terblanche | May 31, 2012 4:50:27 AM

One cannot help but wonder at times whether the disciples of this approach to research, including the authors of this article, take very seriously the advice given on the limitations of this approach.

Be that as it may, these authors, who no doubt consider Professor Joe S. Bain to be the high priest of the order, stay very close to Bain's conceptual framework and point out that the key concepts of market structure analysis are those of market structure, market conduct and market performance. In general, however, the authors conclude that market structure will determine firm conduct and that firm conduct will in turn determine industry performance in the marketplace.

Posted by: Burgert Terblanche | Dec 22, 2012 11:51:58 PM

Essentially, a perfect competition model is assumed and the analysis of many development planners merely revolves around the structure of retailing, wholesaling, or some other element in the channel. If structure is correct, then performance must be. As a result of traditional industrial organization analysis the general policy stance on marketing in South Africa is negative

Posted by: Burgert Terblanche | Dec 31, 2012 11:13:18 AM

According to economist, Dominick T. Armentano, author of Antitrust: the Case for Repeal, competition law has failed in its objectives and should be repealed. The Microsoft case is a classic example of competition law working against the consumer. Compete, but don’t win. Don’t make your products so attractive to consumers that 90 per cent buy from you and not from your competitors, as Microsoft does. Don’t add extra features to your products, at no extra charge, as Microsoft does. If you do, a group of bureaucrats who have never made anything in their lives can slap a 497 million euros (R3.75 billion) fine on you, as the European Commission did to Microsoft in 2004

Posted by: Burgert Terblanche | Jan 24, 2016 11:39:06 AM

Is competition law in developing countries an unaffordable luxury?
In studying the symptoms of problems, such as high marketing costs, high physical losses, high transport costs, barriers to entry leads one to believe that the symptoms are in fact the problems.

Barriers to entry in processing, however, are frequently a direct result of government licensing and trade policy. Monopoly profits are often earned where such policies exist, and substantial improvements in economic efficiency and income distribution could result from a policy that promotes more vigorous competition.

The most important first step, however, in instituting a policy regime supportive for small enterprise growth is to eliminate the existing policy biases against the small private producer. This might be expressed in terms of the need to "level the playing field" so that policies are at least size "neutral".

Unfortunately for small-scale maize millers, large-scale industrial maize millers firms (which previously had a virtual monopoly on the urban market) again have a competitive advantage, as the South African government requires maize flour to be fortified with vitamins if it is to be sold at a retail level. The additional inputs, including machinery, are expensive and access to the needed materials can be difficult to obtain, therefore creating a new barrier to entry. Such a policy favours large maize miller's creating a situation in which large maize millers could return to their oligopoly marketing practices (Jayne 2008).
Imperfections and inefficiencies in the agricultural sectors of developing countries, are really just symptoms of the marketing problem in developing countries. The cause of those symptoms goes much deeper, and it is the cause that must be attacked. Efforts to treat the symptoms have done little to improve the marketing system. In such a context competition law is a luxury that developing countries cannot afford.

BIBLIOGRAPHY Jayne, T.S. (2008). Maize Marketing Margins in South Africa. Presented for 2008 Brown Bag Series of Agriculture Economics Graduate Students, East Lansing, U.S.

Posted by: Burgert Terblanche | Jan 24, 2016 12:04:54 PM

About this methodology (Structure, Conduct, Performance Methodology), which has achieved the status of orthodoxy, W.O. Jones, whose responsibility it was to organize and coordinate the pioneering African research and to synthesize the results, asserts: ‘Primary emphasis in evaluating efficiency was placed on the determinants of price’, and ‘In some ways the measurement of market performance as manifested by the behaviour of prices was more satisfactory than that based on identifying imperfections’
The approach espoused by the FAO and Michigan State University marketing groups is more positive and emphasizes efforts to modify the structure and conduct of marketing systems to reduce transaction costs, physical handling costs, transport costs, physical losses, operating costs, and risks and uncertainties.
To achieve these reductions, the business environment of the marketing firm and the marketing practices employed in that environment must be understood. The development tools will include changes in government policies and las, education and training, credit, technical assistance, and research.
Better awareness of the nature of the barriers to change can make reform efforts more effective. Too often resistance to change is attributed to lack of political will, or vested interest. These are rarely irrelevant, but the situation is actually much more complicated. Several elements slow the changes toward more open markets, especially ideas about how markets do or do not work.
“While economics claims to study the workings of the market, in modern economic theory, the market itself has an even more shadowy role than the firm. In the modern textbook, analysis deals with the determination of market prices, but discussion of the market itself has entirely disappeared.(Roland Coase, 1988)“

Posted by: Burgert Terblanche | Jan 30, 2016 11:08:40 AM

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