market integration

PANDIT JAWAHARLAL NEHRU COLLEGE OF AGRICULTURE & RESEARCH INSTITUTE.

KARAIKAL

AEC505 AGRICULTURAL MARKETING AND PRICE ANALYSIS (2+1)TOPIC ON: MARKET INTEGRATION

COURSE TEACHER: Dr. K. S. KUMARAVELSUBMITTED BY,

R. Jp sivam

CONTENT

Introduction

Types of market integration

Examples for market integration types

Effects of market integration types

Advantages and disadvantages of types of market integration.

Reasons for market integration

Degree of market integration

Measurement of market integration

Market integration

● Integration shows the relationship of the firm in a market. The extent of integration influences the conduct of the firms and consequently their marketing efficiency.

● The behaviour of a highly integrated market is different from that of a disintegrated market.

● Markets differ in the extent of integration and therefore,there is a variation in their degree of efficiency.

CONTD.,

● Kohls and uhl have defined market integration as a process which refers to the expansion of firms by consolidating additional marketing functions and activities under a single management.

● Examples of market integration are the establishment of wholesaling facilities by food retailers and the setting up of another plant by a milk processor.

● In each case, there is a concentration of decision making in the hands of a single management.

Types of Market Integration

There are three basic kinds of market integration

1.Horizontal integration.

2.vertical integration.

3.Conglomeration.

Horizontal integration

● This occurs when a firm or agency gains control of other firms or agencies performing similar marketing functions at the same level in the marketing sequence

● In this type of integration, some marketing agencies combine to form a union with a view to reducing their effective number and the extent of actual competition in the market.

● It is advantageous for the members who join the group.

PARENT AGRIBUSINESS FIRM

FIRM AFIRM AFIRM A FIRM DFIRM CFIRM B

CONTD.,

● In most markets, there is a large number of agencies which do not effectively compete with each other.

● This is indicative of some element of horizontal integration.

● It leads to reduced cost of marketing.

● In this reduced competition possible.

Example: independent oil refineries coming under U.S oil company.

Effects of Horizontal integration

● Buying out a competitor in a time bound way to reduce competition.

● Gaining larger share of the market and higher profits.

● Attaining economies of scale.

● Specializing in the trade.

Advantages of Horizontal integration

(1)Lower costs.

(2)Higher efficiency.

(3)Increased differentiation.

(4)Increased market power.

(5)Reduced competition.

(6)Access to new markets.

(7)Economics of scale.

(8)Economics of scope.

(9)International trade.

Disadvantages of the Horizontal integration

(1)Destroyed value.

(2)Legal repercussions.

(3)Reduced flexibility.

Companies using horizontal integration

Hp Compaq

Facebook WhatsApp

Google Motorola

2. Vertical integration

● This occurs when a firm performs more than one activity in the sequence of the marketing process.

● It is a linking together of two or more functions in the marketing process within a single firm or under a single ownership.

● This type of integration makes it possible to exercise control over both quality and quantity of the product from the beginning of the production process until the product is ready for the consumer.

● It reduces the number of middle men in the marketing channel.

Arrangemet of vertical integration

Wholesaling of feed

Feed mill

Transport agency

Food grains trade

PARENT AGRI BUSINESS FIRM

Example

Meat industry buys all the functioning plants needed for running this meatindustry.

Contd.,

a) Forward integration

If a firm assumes another function of marketing which is closer to the consumption function, it is a case of forward integration. Example: wholesaler assuming the function of retailing

b) Backward integration

This involves ownership or a combination of sources of supply. Example: when a processing firm assumes the function of assembling/purchasing the produce from the villages.

● Balanced vertical integration

The third type of vertical integration is a combination of the backward and the forward vertical integration.

Advantages of Vertical Integration

1. It allows you to invest in assets that are highly specialized.

2. It gives you more control over your business.

3. It allows for positive differentiation.

4. It requires lower costs of transaction.

5. It offers more cost control.

6. It ensures a high level of certainty when it comes to quality.

7. It provides more competitive advantages.

Disadvantages of Vertical Integration

1. It can have capacity-balancing problems.

2. It can bring about more difficulties.

3. It can result in decreased flexibility.

4. It can create some barriers to market entry.

5. It can cause confusion within the business.

6. It requires a huge amount of money.

7. It makes things more difficult.

Effects of Vertical integration

● More profits by taking up additional functions

● Risk reduction through improved market co-ordination

● Improvement in bargaining power and the prospects of influencing prices

● Lowering costs through achieving operational efficiency

3. Conglomeration

A combination of agencies or activities not directly related to each other may, when it operates under a unified management, be termed a conglomeration.

AGRI -BUSINESS CONGLOMERATE

MANUFACTURE OF VANASPATI

SALES AND REPAIRS OF ELECTRONIC GOODS

CLOTH MILL RETAIL -

CHAIN

FRUIT PROCESSING UNIT

FOOD-GRAINS TRADE

Examples

● Hindustan unilever ltd. ● Delhi cloth and general mills.● Birla group.● Tatas. ● J.K.group.● ITC. And● NAFED.

Effects of Conglomeration

● Risk reduction through diversification● Acquisition of financial leverage● Empire – building urge.

Reasons for market integration

● To remove transaction costs

● Foster competition

● Provide better signals for optimal generation and consumption decisions.

● Improve security of supply

Degree of integration

● Ownership integration

This occurs when all the decisions and assets of a firm are completely assumed by another firm.

Example: a processing firm which buys a wholesale firm.

● Contract integration

This involves an agreement between two firms on certain decisions, while each firm retains its separate identity.

Example: tie up of a dhal mill with pulse traders for supply of pulse grains.

●

Measurement of market integration

The measurement or assessment of the extent of market integration is helpful in the formation of appropriate policies for increasing the efficiency of marketing process.

The measurement or assessment of market integration may be attempted at two levels.

1) Integration among firms of a market.

2) Integration among spatially seperated markets.

Integration among firms of a market

● The extent of vertical integration in a market may be assessed by counting the number of functions performed by each firm in the market.

● The extent of horizontal integration may be measured by studying the number of firms performing the same marketing function but operating under one common management.

● The result of a study on the exsistence of vertical and horizontal integration in the marketing of wheat in eight main wheat producing districts of Rajasthan revealed that about half of the marketing firms (50.5%) were integrated vertically because they performed two or three functions.

Integration among spatially separated markets

● The extent to which prices in spatially seperated markets move together or are related to transport costs reflects the degree of integration.

● A two-way analysis of prices in spatially seperated markets may be used to assess the degree of integration.

1) Price correlations.

2) Spatial price differential and Transportation costs.

Price correlation

● The degree of correlation between two prices is taken as an index of the extent to which the two markets are integrated.

● A higher degree of correlation coefficient indicates a greater degree of integration atleast in terms of the pricing of the product between market centres and vice versa.

● The correlation in the price of commodity in any markets is unity under spatial price integration.

Spatial price differential and Transportation costs.

● Correlation method.● Ravallion procedure.● Co integration approach.● Parity bound models (PBM).