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2. A conceptual framework for market analysis

2.1 Definition market and marketing
2.2 Approaches to measure marketing efficiency
2.3 Characterizing dairy marketing systems

2.1 Definition market and marketing

To characterize a marketing system, it must first be defined. The concept of a market has several meanings. It is often seen as a place or location where people meet to buy and sell goods. Conceptually, a market involves the exchange of goods and services for money or on a barter basis with or without spatial connotations. Marketing includes all the activities that are involved in moving products from producers to consumers. This includes all the exchange activities of buying and selling, the physical activities designed to give the product increased time, place and form utility, and the auxiliary activities such as financing, risk bearing and dissemination of information to participants in the marketing process. Abbott (1993) has summarized the tasks and responsibilities of marketing as finding a buyer and transferring ownership; assembling, transporting and storing; sorting, packing and processing; providing the finance for marketing and risk-taking; and assorting and presenting to consumers.

2.2 Approaches to measure marketing efficiency

Early attempts at assessing marketing efficiency focussed on the internal technical and operational efficiency of marketing firms. In this approach, management structures, motivation and incentive arrangements, and decision-making rules and processes were considered as important influences on the efficiency of operations (French, 1977).

Economists also recognized that, by their very nature, markets are systemic and all elements within them are interlinked. So analyses often emphasized the behaviour of groups of similar firms, and the influence the relationships among these firms has on market performance. This approach came to be known as the 'industrial organization' or 'structure-conduct-performance' approach to market analysis. The basic tenet of this approach is that, given certain basic conditions, the structure of an industry or market determines the conduct of its participants (buyers and sellers) which in turn influence its performance. Basic conditions refer to characteristics which are exogenous to the market, for example infrastructure, legal and policy environment, available technology. The structure of the industry, or market, is defined as "those characteristics of the organization of the market that seem to exercise strategic influence on the nature of competition and pricing within the market" (Bain, 1968). The characteristics usually stressed are (a) the number and size distribution of firms in relation to the size of the market, (b) the presence or absence of barriers to entry facing new firms; (c) physical or subjective, product differentiation; (d) degrees of vertical integration; and (e) ratio of fixed to total costs. Conduct refers to behaviour of the firm, for example, pricing and selling policies and tactics, overt or tacit inter-firm cooperation, or rivalry, and product or market related research and development activities. Performance is commonly measured in terms of productive and allocative efficiency. Progressiveness or innovation is also sometimes considered. Where equity and employment creation are national objectives, these are also considered as criteria for performance assessment (Marion and Mueller, 1983).

Productive efficiency, usually calculated at the firm or enterprise level, is the combined result of technical and operational efficiency. Technical efficiency is measured in terms of physical input: output ratios, e.g. amount of butter or cheese per unit of milk. -Theoretically, technical efficiency may be measured as the ratio of actual output to potential maximum output per unit of input, given technology, locational and environmental conditions. In practice, technical efficiency is measured in relative terms by comparing differences in input: output ratios of firms with similar resources.

Operational efficiency, also referred to as firm level allocative or price efficiency, is defined as the level of output at which the value of marginal product equals marginal factor cost for each factor of production or marketing. This is also the profit maximizing level of output.

Allocative efficiency, also referred to as pricing or economic efficiency, is usually measured at the market level. A market is considered economically efficient if (a) all enterprises in the market are productively efficient, (b) the distribution of enterprises, plants and infrastructure are organized in a manner which enables scale and location economies to be exploited, (c) prices provide incentives to producers and consumers that are consistent with available resources and demand. Economic efficiency is achieved when the sum of consumers' and producers' surplus is the maximum, and when Pareto optimality prevail i.e. no change in the economy or market can be made whereby an individual can be made better off without reducing the welfare of another individual. It is assumed that competitive market maximizes the efficiency of resource allocation (Cyert and March, 1983; French, 1977; Colman and Young, 1989).

The most important hypothesis generated by the structure - conduct - performance school of thought, and tested by a wide range of marketing economists, is that as market or industry structure moves away from perfect competition, output and allocative efficiency will decrease and prices will rise. Some of the major problems faced in its empirical application are the following (French, 1977; Scarborough and Kydd, 1992):

(a) Under some circumstances, a given structure may not lead to theoretically anticipated conduct and performance. For example, aggressive rivalry among participants in an oligopolistic market may result in conduct and performance similar to those found under perfectly competitive model. Also, where significant scale economies prevail, oligopolistic market structures may lead to better economic performance than competitive ones. So, any inference using the structure conduct -performance links need to be made with care.

(b) Industrial organization studies focussed mainly on structure and performance, particularly on the link between industry concentration and firm profitability, on correlation between price movements over time, space and form, cost and return elements in unitary marketing margins, entry/exit conditions for firms, and access to market information. Much less attention has been given on conduct due to data and measurement problems and the underdeveloped nature of the theory on conduct.

(c) Market performance depends not only on relationships among similar firms but also on the nature of relationships among different categories of firms within the marketing system, i.e. vertical market relations. Moreover, the basic conditions, considered as given in the industrial organization approach, may in reality impact on market performance, so they need to be studied in a dynamic rather than static framework.

In order to respond to these concerns and deficiencies, two approaches emerged. In the first case, the scope of the industrial organization approach has been broadened to include both horizontal and vertical market relations in assessing market performance, and to identify binding constraints on, or in, the system. This extended approach is known as the 'food or commodity system framework' (Schaffer, 1973 and 1980) and is similar to the French concept of "filiére", which means a commodity production and marketing chain (Lossouarn, 1992). Further, this approach recognizes the importance of joint products and services, and the existence of marketing firms and channels that handle a number of commodities or services using the same facilities.

In the second and more recent case, alternative theories of market organization are proposed. Prominent among these are the transactions cost theory, information theory and convention theory. In these theories, markets, firms, relational contracts, vertical integration, groups and associations are regarded as different forms of organization ruling transactions implying that market is just one form of organization in the process of transaction. Non-price relationships in transactions are given particular importance in these theories. Also, a distinction is made between institution and organization. Institutions are social rules, norms and conventions which determine the nature of social interaction. Organizations are units of coordination of activities of agents with a goal or a set of goals. In short, organizations are players of the game and institutions are rules of the game (for further reference see, Bardhan, 1989; Menard, 1990; North, 1990; Brousseau, 1993). There are few empirical applications of these theories in the less developed countries, particularly in the area of food marketing. Moustier (1996) gives a good review of the conceptual differences among the three strands of organization theory, and made an application to vegetable market organization in Brazzaville.

Theoretical developments in transactions costs economics is based on the premise that any operationalized version of competition cannot be safely used as a norm against which to evaluate real market structure and behaviour. However, all markets have to cope with transactions costs, asymmetric information and moral hazard, and these are hardly completely measurable (Harris -White, 1997; Timmer, 1997). Therefore, apart from competitive behaviour, evaluation of market efficiency may include other criteria such as the impact of market distance on agricultural productivity (von Oppen et al., 1997), dynamic and adaptive efficiency reflected in growth and investment via price integration and operational cost effectiveness (Palaskas et al., 1997; Timmer, 1997).

The primary interest in agricultural market analysis is to assess the impacts of marketing inefficiencies on consumer and producer prices, on levels of production and consumption, and on exports or imports. It is recognized that markets rarely, if ever, approach the optimum with respect to economic efficiency defined by competitive conditions. However, at the characterization phase, it is more important to describe how the dairy marketing systems function than to measure whether they function efficiently. Even if the concept of economic efficiency is inadequate or not fully empirically testable to guide policy makers or a society in organizing and using its resources, some of the methods or tools of economic efficiency may be meaningfully used to characterize marketing systems and assess how various participants and economic variables in a system are interrelated (Hammond, 1990).

2.3 Characterizing dairy marketing systems

A dairy marketing system may be characterized by:

· the range of dairy products marketed;

· the size, structure and organization of the enterprises participating in the market for each product and in the entire marketing chain;

· the conduct and performance of the marketing system; and

· the existing marketing policies, institutions and organizations, and the physical environment within which marketing takes place.

The degree of vertical and horizontal integration in a dairy marketing system may vary from country to country, or between regions and milksheds within a country. For example, in one case most of the milk may be sold and consumed as raw milk while in another case, in addition to raw milk, several processed dairy products such as cheese and butter may be marketed and consumed. The structure and organization of dairy marketing and the marketing practices are likely to differ between these two situations. Since cross-site comparison is a major objective of ILRI dairy research, comparison of the entire dairy marketing system is likely to be more meaningful than comparison of a single product, e.g. raw milk, marketing, or of a sub-system e.g. a processing plant, assembly or transportation system (Hammond, 1990). Adoption of the 'food or commodity system framework' facilitates multi-commodity marketing system analysis. The distinction between organization and institutions made within the framework of the theories of organization may be recognized without necessarily adopting those theories at the characterization phase. These theories may be applied subsequently in any detailed investigation of particular dairy marketing system.

Several parameters or indicators may be used to characterize the system and each of its components. Such parameters or indicators may be classified into two broad groups:

Functional parameters: These are key descriptors of how the system operates. Examples include dairy products marketed, marketing agents, marketing outlets, prices at each marketing node, modes of transporting marketed products, etc. Functional parameters combine characteristics related to market structure and conduct.

Performance indicators: These parameters permit assessment of the performance of the system. Examples are the percentage of total dairy products marketed, the ratio of standardized to non-standardized products marketed; the ratio of marketing to total costs; the ratio of farm gate to retail price. The importance of identifying performance indicators is that they form the baseline against which any changes in the efficiency or performance of the system can be measured.

Examples of functional parameters and performance indicators for each component of a dairy marketing system are given in Table 2.

Some important terms related to characterization are defined here. A dairy product is defined as milk or any product derived from milk. Within the general class of dairy foods, different products will be differentiated by their physical composition or form, or where the market or consumer differentiates them. Generally, product differentiation will occur at the marketing node (see below). A dairy product is considered to be standardized when it meets a legally accepted minimum standard or quality (e.g. pasteurized, homogenized milk with 4% butter fat content) as opposed to a non-standardized dairy product which does not conform to any such standards e.g. raw milk. In some less developed country situations, any legal standard may not exist for local products but informal local standard may exist due to consumer choice and preference established over a long period.

Formal market includes firms and organizations whose daily operations are guided by statutory rules and procedures, e.g. a parastatal dairy processing plant or a company engaged in dairy marketing. Informal market includes firms whose daily operations are not guided by statutory rules and procedures except for any trade license, e.g. dairy producers and itinerant traders.

A marketing chain defines the flow of commodities from producers to consumers that brings into place economic agents who perform complementary functions with the aim of satisfying both producers and consumers. A marketing node is defined as any point in the marketing chain where an exchange and/or transformation of a dairy product takes place. A marketing chain may link both formal and informal market agents.

A marketing chain may connect one or more milk or dairy sheds. A dairy shed is an area where milk production is a major activity. A milk shed may serve one or more consumption centres or cities. Also, a consumption centre may be served by more than one milk shed (see illustration Fig. 1). For example, in Addis Ababa, raw milk comes from the Addis Ababa milkshed comprising about 100 km radius around Addis, but butter in Addis market comes from several milksheds located up to 600 km away.

Figure 1: Illustration of a milk shed

Table 2. Functional parameters and performance indicators for characterizing a dairy marketing system.

System component

Functional Parameters

Performance Indicators

Dairy products marketed

Dairy products marketed:
Standardized vs non-standardized;
Domestic vs imported

· Percentage of standardized dairy products marketed in total dairy sales
· Self sufficiency rate
· Consumer ratings of dairy products' quality and standards

Market size, structure and organization

· Marketing agents: number, functions performed, gender and socio-cultural attributes
· Organization of agents
· Seasonal variation: Product types (volume)
· Organization of collection and distribution: geographical coverage (types of areas, distance in km and time)
· Packaging
· Storage
· Modes of transporting marketed products
· Market information mechanisms: types and sources of information, frequency
· Marketing constraints by type of market
· Equipment and technology
· Labor including training

· Share of dairy products handled by formal vs informal markets
· Number of marketing agents by type of market
· Seller and buyer concentrations
· Percentage of marketing agents performing single vs multiple functions
· Distance (km) between marketing nodes
· Percentage of producers who market their own produce
· Percent of market agents and producers having access to market information
· Frequency of marketing information

Marketing policy and environment

· Regulations on quality e.g. minimum standards
· Price controls
· Licensing
· Subsidies, Taxes
· Import/export duties, levies, quotas, subsidies
· Capital/credit supply Organizations:
· Marketing board
· Cooperatives for collection
· Processing plants

· Entries/exits to/from dairy market
· Levels of taxation and subsidization on dairy marketing
· Rates of return on investment
· Share of formal agricultural credit to dairy

Market conduct and performance

· Prices at each marketing node
· Marketing costs and returns by channel and season
· Reliability and regularity of supply
· Existence of contract (formal, informal, verbal, written, forward sale)

· Share of dairy product marketed in total production
· Price differential: formal vs informal, standardized vs non-standardized
· Price efficiency
· Spatial and temporal (seasonal) price differences
· Farm to retail price spread and marketing margins
· Profitability and rates of return at different marketing nodes
· Import parity price
· Percent losses during marketing
· Losses between marketing nodes
· Percentage of producers/consumers served by each system
· Percentage of marketing agents having received training in marketing
· Equity capital and credit including sources

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