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
[email protected]

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

In any analysis of the competitive effects of a proposed transaction, the competition authorities will use a certain economic framework. The specific framework used by the authorities will naturally have an effect on the outcome. It seems that the broad framework used by the South African authorities is that of the Structure-Conduct-Performance framework.

Posted by: Burgert Terblanche | Jun 11, 2021 11:39:21 AM

Competition Law should be called “high-profit” law

Burgert Terblanche

An official of one of the large food-manufacturing firms, an economist as well as a practical businessman, who has given much attention to the theory of imperfect competition in relation to marketing margins, once said, “It seems to me that the imperfect-competition theorists are out of touch with reality.

Take my firm, for instance. Right now we could, and according to theory should, reduce the price of our product. But if we do, many or most of our smaller competitors would be driven out of business. This would increase our long-run control over the market and subject us to greater danger of prosecution by the Competition authorities.

If we don’t lower our prices, we make more profit, and government gets most of it through income taxes, our smaller competitors are satisfied and don’t write to the Competition authorities. What is the answer, from a social viewpoint and from my own firm’s best long-run interests? Frankly, I don’t know, and I don’t believe you will find the answer in any book on imperfect competition!"

Posted by: Burgert Terblanche | Jun 11, 2021 2:16:20 PM


An important finding of the study was that the wheat milling and baking industries lack of information sharing which would ensure more accurate information was available. From the viewpoint of the study, this lack of information sharing was mainly attributed to the investigation by the Competition Commission into these industries. The Competition Commission should ensure that the industry, which in principle is in favour of what the Commission does, plays the role of a fair watch dog that protects businesses and prosecutes guilty parties.

Posted by: Burgert Terblanche | Jun 20, 2021 11:01:50 AM

" It is important to bear in mind that supermarkets are not development agencies- they are profit- oriented businesses" Nick Vink (Good for whom? Supermarkets and small farmers in South Africa- a critical review of current approaches to increasing access to moden markets. Agrekon-March 2013)

We should be idealistic fools, indeed, to expect farmers , any more than businessmen or other groups, to have a strictly social viewpoint toward marketing. We have heard of no considerable number of university teachers of marketing advocating lower professional salaries in order to bring higher education within the reach of a greater number of potential students!

Posted by: Burgert Terblanche | Jan 19, 2024 11:15:10 AM

The only argument in favour of competition regulation or regulation of any kind in a developing country may relate to the belief that markets do not work benignly the way economists say they do. Nick Vink (Good for whom? Supermarkets and small farmers in South Africa- a critical review of current approaches to increasing access to moden markets. Agrekon-March 2013)

If it is believed that free markets both exploit the peasants and harm the consumer, then it is hard to believe that adjusting a few regulations could make the market work to the benefit of all. High marketing cost, too many layers of middlemen in the channel to the detriment of farmers, high physical losses, speculation and hoarding by middlemen, insufficient market information for farmers and lack of grades and standars are really just symptoms of the marketing problems 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; that in such contexts competition law is a luxury developing countries cannot afford

Posted by: Burgert Terblanche | Jan 19, 2024 11:50:37 AM

"The notion that competition law has no meaningful place in the economic policy of developing countries is rooted partly in a failure of the intellect ( intellectual environment in developing countries) that has accepted far too literally the meaning of a "free" market (David Lewis)
This is an abstract and theoretical notion, however, since all market-based economies depend on publicly -accepted rules (i.e. regulations) in order to function (Bromley1993, Samuels 1992). Without such rules, transaction costs of exchange become so high that markets break down. A given set of market rules will create a particlar pattern of income distribution, effective demand, and market prices. A different set of market rules would result in another pattern of effective demand, and prices (Schmid 1992). There are a variety of competitive equilibra and economic prices that could flow from a given "free market" depending on the rules structuring trade within that market. So, in attempting to determine comparative advantage, which set of regulations should be consideted market distortions that alter the shadow value of labor? Should an absence of these laws be construed as an absence of political influence over the market?
Clearly, governments implement policy both by what they do and what they do not do (Seidman 1974). Speaking of the United States in the 20th Century, Carl Auerbach has asked: "Shall we say, then, that when the state chooses not to exercise its power to prohibit racial discrimination, it is sanctioning such discrimination and such inaction constitutes state action subject to constitutional commands? Analogously, an absence of marketing boards and controlled prices in food markets could not imply that government influences over market activity is absent.

Posted by: Burgert Terblanche | Jan 19, 2024 12:12:18 PM

Marketing is the very sector in which experience and education are in short supply. In developing countries probably the greatest barrie to improving marketing systems is the reluctance of governmenrs to spend substantial amount of money to develop marketing firms. As urbanization trends accelerate, marketing problems will continue and will be compounded until that official reluctance is corrected.
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 they may be less critical than other factors, especially ideas about how markets do or do not work, preoccupation with the ethnic distribution of the benefits of liberalization, and the need to consider the ramifications on the whole system of partial liberalizing steps. If these factors are confronted when designing liberalization programs, the probabilityof success will certainly increase.
If, before the advent of the public health crisis South Africa , the workings of the food distribution market had been understood, would the new set of competition institutions created as part of the govermental landscape have stood by idly while each and every day the metro police savagely abused vulnerable street traders? Would they have responded so hesitantly to the voilence directed at foreign spaza shop owners, violence perpetrated by the public, but often with the tacit support of the police and egged on by xenophobic political leaders? Would they, even now, hesitats to take the first step to spend substantial amount of mony to develop small marketing firms had they understood that marketing of agricultural products is not only an important mechanism for redistributing resourses, wealth and power but an essential tool to support all of its participants.

Posted by: Burgert Terblanche | Jan 21, 2024 2:45:02 AM

Not all profit arise out of a need for them. Some are due to imperfect competition of various kinds. Efforts to reduce profits in marketing, however, should not depend too much upon the elimination of "monopoly" or imperfect competition. Efforts along these lines to date have resulted in more harm than good, by discouraging efficient types of marketing enterprises and placing inefficient operations under the protective wing of the law.
Competition law in general have done much harm by preventing or retarding vertical and horizontal integration in marketing and by causing the adoption of trade practices by large firms which are designed to keep them out of trouble with the "antitrust lawyers" rather than to attain maximum efficiency in marketing. Society- the media the legislature; even the judiciary- has great difficulty in seeing the victims of competition law. Ironically, society can easily see the point of competition law when it finds an aggrieved competitor (Lewis). But they cannot see or hear the real victims of competition law, the consumers, those who pay the price of the inefficiencies generated in the agricultural marketing sector.

Posted by: Burgert Terblanche | Jan 21, 2024 3:39:39 PM

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