Agricultural Marketing and Price Analysis

Economics – is defined as the study of how limited resources can best be used to fulfill unlimited
human wants. Whereas the wants or desires of human beings are unlimited, the means or resources
available for meeting these wants or desires are limited and scarce.
Economics thus deals with making the best use of available resources in order to fulfill these
unlimited wants.
However, the allocation of scarce resources depends on the prevailing economic system.
Marketing – a series of services involved in moving the product from the point of consumption.

Services – function performed on or for a product that alters its from, time place, or possession
characteristics. Services add value to a product and are generally performed to meet existing or
anticipated consumer demand.

Point of production – the point of usual first sale by the farmer, typically at the farm or at farmer’s
home.
Point of Consumption – the point where marketing ends. The point of last purchase or sale.

Market – a group of buyers and sellers with facilities for trading each other. A place where buyers
and sellers meet to exchange goods or services.

The Market System

In market economy the basic economic questions: how to produce, what to produce, and
for whom to produce are concerned; answered by market forces. You may be surprised to learn
that no individual or organization is consciously concerned with the triad of economic problems.
One of the Founding Fathers of economics, Adam Smith (1776), described this “the
invisible or hidden hand” of the market operated in a competitive environment through the pursuit
of self-interest to allocate resources in society’s best interest.
The principle of the “invisible hand” holds that every individual in selfishly pursuing only
her/his personal good, is led, as if by an invisible hand, to achieve the best good for all.
Three Market Economic System
1. Free Market Economy/Capitalist – where there is a very limited role for the government.
It represents perfect competition market structure.
2. Command/Planned Economy/Communist – where the government takes virtually total
control. As with market structures it represents monopoly
3. Mixed Economy – A system that combines aspects of both capitalism and socialism
4. Traditional Economy – in which economic decisions are based on customs and beliefs.
People will make what they always have made and will do the same work their parents did.
They exchanged goods that is done through bartering (trading without using money).
Market based economic system – assumes that the market is free and competitive.
A competitive market is a market in which there are many buyers and many sellers so that each
has negligible impact on the market price. In a free and competitive market-based economy, it is
the price mechanism that works out the interests of all individual producers and consumers.
It was proposed that the responsibilities of government should be confined to the traditional
functions – the administration of justice, social statistical reporting, national defense and money
supply with only little interference in the economy. This has been known as the “laissez-faire”
doctrine.

1. Market-based economic system

Characteristics of this system
• Ownership: Nearly all of the country's factors of production are owned privately. It is
private individuals, or groups of individuals, who own the resources. Through the legal
system, the government must uphold the property rights of these private individuals.
• Objectives: Everyone in this system is motivated by pure self-interest. Consumers
maximize welfare, firms maximize profits and the private individuals, who own the
factors of production, aim to maximize rents (on land), wages (on labor), interest and
profit (on capital).
• Free enterprise: Basically, firms can sell anything they want. They effectively respond
to the consumers, who are allowed to buy anything that is sold by the producers.
Workers can take on any job they want (this may seem obvious, but wait and see what
happens in the command economy).
• The level of competition: Very high. Basically, it is assumed that nearly every market
is a perfectly competitive one, with numerous buyers and sellers and no barriers to entry
or exit. Firms are competing desperately for customers and the consumers are
competing with each other for the goods on offer.
• The pricing system: Nearly all markets are perfectly competitive. You may remember
that in these circumstances, the price mechanism allocates the economy's resources.
The reason why it is called the price' mechanism is because the price acts as a signal
and an incentive for producers to act in the required way so as to maximize their gain,
which, in turn, optimizes the allocation of resources in the whole economy.
• What, how and for whom?

What: "whatever the consumers want." You might think that the firms decide what is
finally produced. Actually, in a free market economy, it is the consumers who have all
the power. Consumer sovereignty exists. In a free market, a firm will only produce a
good if the consumer is prepared to buy it. Through their purchases (or money 'votes')
consumers effectively dictate to the firms what should be produced.

How will it be produced? Due to the highly competitive environment that exists, there
will be pressure on firms to produce the goods as efficiently as possible and keep their
prices as low as possible. As we said earlier, most industries will be perfectly
competitive, so in the long run firms should be both productively efficient and
allocatively efficient.

For whom will it be produced? Well, we said earlier that consumers' money votes
determines what is actually produced. But it will also determine what consumers can
actually buy. Those with more money will be able to consume more of the goods
produced. Who has the most money? The rich, of course
2. Command Economy
Characteristics of this system
• Ownership: Nearly all of the country's factors of production are owned publicly by the
government (or the state). The only factor over which the government does not have
total control is labor, but as you will see, they certainly have indirect control over the
workers.
• Objectives: The complete opposite of the pure self-interest of the free market system.
No one (in theory) thinks of himself (or herself). Consumers, workers and the
government are all assumed to be working for the 'common good'. This system is often
associated with communist Soviet Union and its followers. (as it was before 1989).
• Free enterprise: There is none.
• The level of competition: Very little. Certainly, in the former Soviet Union and eastern
block as a whole, black markets used to develop as a result of shortages in the shops.
There would be competition between these racketeers. But in theory there was no
competition.
• The pricing system: There is no competition, so there is no price mechanism. The
authorities set the prices. It is because they set prices at low levels to make sure that
everyone can afford the goods that excess demand occurs causing long queues for
goods outside shops. Another inevitable consequence is the creation of black markets.
• The planning system: This is an extra characteristic of the command economy. The
other five has tried to follow the five given in the 'free market economy' section. As the
government runs the system, they have the job of planning how all the resources should
be used. They have to decide what should be produced and in what quantities. They
must decide how the goods are to be made. What labor should be used and where?
What techniques of production shall we use? How will the completed goods be divided
(who get what) between the workers (or consumers)? The key point is that they directly
set the output levels and price levels.
• What, How and for whom

What will be produced? The consumer no longer has any control. The planners (or the
government) decide what will be produced.

How will it be produced? There are no such things as 'firms' in a planned economy. The
planners direct the resources into producing 'units'. They are not really firms. They have
no autonomy. So, as we said above, the planners decide on the quantities of output and
methods of production.

For whom will it be produced? In the free market, the richer you were, the more you
could buy. Of course, very poor people could end up with very little. The planner tries
to be fair in distributing the output of the economy. Wages are determined by the
planners, as are the prices of the goods produced. So, the government is, effectively,
determining how much each consumer can consume.

3. A Mixed Economy
Characteristics of this system
• Ownership. The government owns some of the country's factors of production
publicly and some are owned privately.
 • Objectives. Again, a combination of the two extremes. The market part of the
economy will be motivated by self-interest. Firms will maximize profit, consumers
will maximize their welfare and the factor owners will maximize rent, wage,
interest and profit. The government, again, has the 'common good' goal.
• Free enterprise. Only in the free market part of the economy (the private sector).
• The level of competition. Again, the private sector can be quite competitive. It
depends on the market structure that prevails in the various industries. In the real
world few industries are perfectly competitive. Governments do tend to set up
bodies, though, whose job is to make sure that industries do not become too
uncompetitive.
• The pricing system. The price mechanism operates in the private sector. Its
efficiency depends on how competitive the market structures are. The government
run activities tend to be provided free at the point of use, although there are some
charges even in these areas (paying for prescriptions and school lunches)
Why is Marketing Productive?
Marketing is productive because it creates utility i.e. the process of making useful goods and
services. Utility is not physical quality of a thing in itself. It is the want satisfying power of an
object or services.
Four Types of Utility

Form utility – is created if goods possess the required properties.

Place utility – when the products are made available where they are most wanted.
Time utility – created when products are made available when they are most wanted.

Possession utility – created when goods are transferred or are placed under control of the persons
who desire to use them.
Agricultural Marketing System and its Role in the Economy
The marketing system for agricultural products is a complex system within which various
subsystem interact with each other and with the different marketing environments. It has the
following characteristics

1. It has objectives or goals to achieve. These are normative criteria set by the society.
2. In the course of attaining objectives, it has components or participants that perform certain
functions such as transport, storage, processing, grading, standardization and market
information and all the necessary jobs between the decision to produce and the final
consumption of the product.

Agricultural Marketing Components or Subsystem

1. Producer subsystem – consist of the initiator of production who may be small farmers or
corporate farms. Goods produced in this system are brought to the final consumer vial
channel subsystem.
2. Channel subsystem – consist of market participants or intermediaries who are directly
responsible for making the farmers products available to the user at the right place, time
and from. The are considered actors in the system who performs vital functions, but
sometimes they get the ire of the producers, consumer and the government. They are
branded as “necessary evil”.
 3. Flow subsystem – facilitates products financial and information flow. Information to be
relayed consist of product trends, grades and prices.
4. Functional subsystem – consist of marketing function or services related to creation of
place, time and form utilities that involved assembly, concentration, dispersion and
equalized activities.
5. Consumer subsystem – refers to the final repository of products produced by farmers.
6. Environment subsystem – facilitates market performance, encompasses four areas or
factors that affect the working of the entire marketing system: climactic/physical, socio-
cultural, technological, and legal/political factors.
The Role of Marketing in Economic Development
A knowledge of marketing and its problem help farmers make important decision on the following
aspects.
1. What to produce and how to prepare it for sale.
2. When are where to sell.
3. How much of the marketing job should be done by the farmers himself either as an
individual or as a member of the group.
4. What can be done to expand the market.
5. Which of the many different marketing arrangements are desirable.
6. How many changes necessary to correct undesirable practices be secured.

Problem Areas in Agricultural Marketing

1. Characteristics of the products
• Perishability – any delay in the disposal means quality deterioration and weight
loss that affect their market price.
• Seasonality of production
• Bulkiness – low in price, relative to their volume and weight.
• Non-homogeneity
2. Number of producers
3. Characteristics of the consumer – demand vary from consumer to consumer, but for a
single consumer, it may change over time, sometimes rapidly and sometimes slowly.
4. Reflecting the demand of consumers – the need for marketing system to reflect by prices
the demands of consumers so that products may flow to the most appropriate market.
Five Major Problems that Hinder Efficiency of Marketing

• Poor condition of physical infrastructure that link producers to market intermediaries and
final consumers
• Minimal flow of market information
• Small volume of market-oriented output for many agricultural commodities
• Inadequate know-how on the part of farmers and traders especially on grading and
handling.
• Absence or lack of definitive public marketing policies and the non-enforcement of public
regulatory prices.
Approaches and Methodologies to the Study of Agricultural Marketing
Agricultural marketing includes the services and functions of different institutions and
intermediaries. Agricultural marketing problems vary from commodity to commodity largely due
to the seasonality of production, the variations in its handling, storage, processing and the number
of intermediaries involved in them.
 Marketing economists have developed various approaches to study agricultural marketing.
The functional, institutional, commodity, the behavioral system and the structure-conduct-
performance approaches are the major ones.
A. The Commodity Approach – is product-oriented rather than marketing-oriented function.
This approach simply follows one product, such as coffee, and studies what is done to the
commodity and who does it as it moves through the marketing system. It helps to pinpoint the
specific marketing problems of each commodity as well to develop the market for the specific
commodity.

The approach follows the commodity along the path between producer and consumer and
is concerned with describing what is done and how the commodity could be handled more
efficiently. It combines both functional and institutional approaches. It is extremely useful to the
person who is interested in only one product since it does allow in-depth analyses.
However, it has also a disadvantage because it ignores the between product and market
alternative and also the multi-product firms. As opposed to the analysis of general equilibrium or
any other sort of that kind, this approach deals about the marketing of a single commodity or
certain commodity groups such as grain marketing, food marketing.
Thus, it is difficult to see the interaction and interrelationships that exist among
commodities which could have important implications governing the behavior of the market and
market agents.

B. The Institutional Approach – study at various agencies and business structures involved
in the marketing process. It attempts to answer the questions “who”.
The institutional approach examines agencies and institutions which performs various
functions in the marketing process. It focuses on the study of the various institutions, middlemen
and other agencies which add utility to the product. These organizations or market participants are
those who perform the activities necessary to transfer goods from the producer to consumer,
because of the benefit of specialization and scale that exist in marketing.
It is classified into five: Merchant middlemen, agent middlemen, facilitative organizations,
processors and manufacturers (millers) and speculative middlemen. The question is that why the
institutional approach? We are interested in the institutional approach because middlemen’s
specialization in performing a specific marketing functions leads to improvement in productivity
and hence a decreased cost. This in turn results in price fall adding to the overall efficiency of the
market. The second reason is the gains from specialization. Marketing functions are marked by
economies of scale. Hence specialization reduces cost and hence improves efficiency. Average cost
of performing marketing functions falls as the volume of products handled rises. Finally,
middlemen reduce market search and transaction costs.

• Middlemen – individuals or business concerns that specialize in performing the

various marketing functions involved in the purchase and sale of goods as they are
moved from producers to consumers.
Classification of Middlemen
1. Merchant Middlemen – take little to and therefore own, the product they handle. They
buy and sell for their own gain.
• Contract Buyer – they estimate the total value of the crop by appraising the
probable harvest multiplied by the expected price at harvest time.
 • Grain Miller – they own warehouses and mills and procure grains from suppliers,
including their own agents, farmers, wholesalers and farmers’ cooperative.
• Wholesaler – they sell to retailers, other wholesalers and industrial users but do
not sell in significant amounts to ultimate consumer.
They make up a highly heterogeneous group of varying sizes and characteristics. They can
be local buyers or rural assemblers who buy goods in the producing area directly from farmers and
transport the products to the larger cities where they are sold to other wholesalers and processors.

• Retailers – they buy products for resale directly to the ultimate consumer. Retailers
may perform all of the marketing functions. Mostly, their number is large
compared to other merchant middlemen.
2. Agent Middlemen – act only as representative of their clients. They do not take title to,
and therefore do not own the products they handle.
While merchant middlemen (wholesalers and retailers) secure their income from a margin
between the buying and selling prices, agent middlemen receive their income in the form of fees
and commissions. Agent middlemen in reality sell services to their principals, not physical goods
to customers.
In many instances, the power of agent middlemen is market knowledge and “know-how”
which they use in bringing buyers and sellers together. Though the names may differ somewhat,
agent middlemen can be categorized into two major groups, commission-men and brokers.

• Commission agent – they take over the physical handling of the product, arranges
for the terms of sales, collects, deducts his fees and permit the balance to his
principal. They are usually given broad powers by those who transfer goods to
them.
• Broker – they do not have physical control over the product.
They usually follow the directions of his principal closely and have less discretionary
power in price negotiations than commission-men. They just act in between the sellers and buyers,
link them and assist in negotiations. In agriculture, livestock commission-men and grain brokers
on the grain exchanges are good examples of those commission-men and brokers, respectively.
3. Speculative middlemen
Speculative middlemen are those who take title to products with the main objective of
making profits from price fluctuations. All merchant middlemen, of course, speculate in the sense
that they must face uncertain conditions. More often, however, wholesalers and retailers attempt
to secure their incomes through handling and merchandizing their products and to hold the
uncertain aspects to a minimum.
Speculative middlemen seek out and specialize in taking these risks and usually do a
minimum of handling and merchandizing. They usually attempt to earn their profits from the short-
run fluctuations in prices. Purchases and sales are usually made at the same level in the marketing
channel. Speculative middlemen often perform a very important job as a competitive force in the
protection of an adequate pricing structure.
4. Facilitative organizations
Facilitative organizations assist the various middlemen in performing their tasks. Such
organizations do not directly participate in marketing process as either merchants or agents.
 One group of these organizations provides the physical facilities for the handling of
products or for bringing buyers and sellers together. They take no direct part in the buying and
selling of the products. However, they establish “the rules of the game” which must be followed
by the trading middlemen, such as hours of trading and terms of sale. They may also aid in grading,
arranging and transmitting payment and the like.

They receive their income from fees and commissions from those who use their facilities.
Another group of organizations falling in this general category is the trade associations. The
primary purpose of a large majority of these organizations is to gather, evaluate, and disseminate
information of value to a particular group of traders. They may carry on research for mutual
interest.
C. Functional Approach – one method of classifying the activities in the marketing process
is to break down processes into functions. A marketing function may be defined as major
specialized activity performed in the accomplishing the market process.

1. Exchange function – are those activities involved in the transfer of title goods. They
represent the point at which price determination enters into the study of marketing.
a. Buying (assembling) function – largely the one of seeking out the sources of supply,
assembling the products, and the activities associated with purchase.
b. Selling functions – covers all various activities which sometimes are called
merchandising.
Exchange functions (buying and selling) are what are commonly thought of as marketing.
The buying function is concerned with the search for and evaluation of products and services and
obtain them.
The selling function is concerned with promotion of the products through personal
salesmen and advertising. In general, they involve finding a buyer or a seller, negotiating price and
transferring ownership (but not necessarily physical transfer).
At this point, formal or informal property rights are vital to ensure the reliable transfer of
ownership and to guarantee legality (e.g. coffees on sale were not stolen and will not be reclaimed).

As products move through many hands before reaching the final user, title changes several
times. Each time title changes and a price must be set. This means that pricing plays an integral
part in marketing.

This involves price negotiations and transferring of product ownership through buying and
selling activities.

2. Physical function – are those that involved handling, movement and physical change of
the actual commodity itself from producer to consumer. They are involved in solving the
problem of when, what and where in marketing. It enables the actual flow of commodities
through space and time, and their transformation to a form desired by the consumer.
a. Assembling or concentrating the product at convenient places allows its efficient
transportation.
b. Storage function – allows the commodity to be kept until the demand rises, thereby
stabilizing supply and concerned with making goods available at the desired time.
c. Transportation function – concerned with making goods available at the proper place.
 d. Processing function – all essentially manufacturing activities that change the basic
form of the product. This transforms the commodity into the products desired by
consumers.
e. Grading and standardizing allow the consumer to be more confident of the
characteristics of the good being purchased.

2.1. Transportation
Transportation provides desired changes in location. It allows the cultivating of produce in
areas particularly adapted to their production and then moving them to the buyers. However, the
long distances over which a produce are transported often results in relatively high transportation
costs, and potentially lower quality, due to the damage during transport if the products are not
properly packed.
2.2. Handling and packaging
For transporting the product from seller to buyer, proper handling and packing are crucial.
In order for the product to be transported, it must be handled and packaged properly. Proper
packaging; preserves the moisture level and protects it from contamination, facilitates handling of
the product, makes the final product more attractive to the buyers, and gives instructions on how
to handle, store and use it.
The material used for packaging is a major factor in regulating the moisture content of the
stored product. The selection of the packaging material is therefore crucial to preserve the humidity
level, and thus the viability of the product. Packaging material should be strong, durable and well
labeled.

Many different materials are generally used for packaging agricultural products. The
selection of the most appropriate material and size is crucial and differs according to type of storage
and handling, distribution and commercialization needs.

Air-proof containers provide effective protection against insect damage, and fungi. The
thickness of the packaging and their uniformity determine their permeability to moisture. For
example, the Ethiopian Commodity Exchange (ECX) provides standard sacks to traders and
traders in turn provide these sacks to farmers for storing and transporting quality coffee that meets
the export standards.
2.3.Assembly

This activity enables us bring together products from a large number of farms scattered
around the countryside to a central point where they can be gathered in large lots, sorted, graded
and packaged according to the desired specifications in quantity ready for the market.

2.4.Storage
Most agricultural products storage is delicate, as specific temperature and proper packaging
must be observed to maintain the desired humidity level. Storage requirements are different
depending on the product form (packaged or loose) and storage type (long term or short term).
Without proper storage, most agricultural products lose their taste. This affects the
marketability of the product as consumers will not engage in repeated buying behaviors following
low quality. Storage also facilitates the adjustment of product supplies to its demand and reduces
price fluctuations as the product can be kept for some period of time and supply can be evened
out, respectively.
 2.5.Standardization and Grading
Standardization refers to the determination of the standards to be established for different
commodities. It is the establishment of quality and quantity measurement that makes selling and
pricing possible.
Standards are set on the basis of certain features such as size, weight, color, appearance,
texture, moisture content, amount of foreign matter present, etc.
Grading, however, refers to sorting of product attributes into uniform categories according
to the quality specifications laid down. Grading follows standardization. It is a sub-function of
standardization.
Grades and standards assist market participants to determine the price because both of them
will know specifically what type of product they are dealing with under a grading and certification
system. Grading is important when the buyers demand products that meet specific standards and/or
when producers want to be paid according to the quality of their products.
3. Facilitating function – are those which make possible the smooth performance of the
exchange physical functions. These activities are not directly involved in either the
exchange of title or in the physical handling of products.
They are those activities which enable the exchange process to take place. Product
standardization, financing, risk bearing and market intelligence are the four important components
of facilitating functions.

Facilitating functions are not a direct part of either the change of title or the physical
movement of produce, but the facilitation of these activities.
a. Standardization function – establishment and maintenance of uniform and
measurements.
Standardization – is the practice of making the quality specifications of grade uniform
among buyers and sellers and from place to place and from time to time.
Grading – is the sorting of products into lots or units according to one or more of their
quality attributes. The factors commonly used as grade specifications are size, weight,
shape, color, odor, length, diameter, strength, density, texture, uniformity and etc.

Standardization simplifies exchange functions and reduce marketing costs by enabling

buyers to state what they want and sellers to convey what they are able and willing to supply with
respect to both quantity and quality. In the absence of standardization trade either becomes more
expensive or impossible altogether.
b. Financing function – is the advancing of money to carry on the various aspects of
marketing.

In any production system, it is true that there are lags between investing in the necessary
inputs and receiving the payment from the sale of produce. During these lag periods some
individual or institution must finance the investment.
The question of where the funding of the investment is to come from, at all points between
production and consumption, is one that marketing must address.
 Consider the problem of an exporter who wishes to have good quality coffee for export
where few farmers have the necessary drying and packaging materials, and storage facilities. This
is a marketing problem.
These could be solved by the exporters or some other institutions providing these facilities
to coffee producers.

c. Risk-bearing function – acceptance of the possibility of loss in the marketing of

product. It can be classified into:
• Physical risks – arise from destruction or deterioration of the product through
fire, accident, wind, earthquake, cold and heat.
• Market risks – occurs because of the change in the value of the product as it is
marketed
In both the production and marketing of produce the possibility of incurring losses is
always present. Physical risks include the destruction or deterioration of the produce through fire,
excessive heat or cold, pests, floods, earthquakes etc. Market risks are those of adverse changes in
the value of the produce between the processes of production and consumption. A change in
consumer tastes can reduce the attractiveness of the produce and is, therefore, also a risk. All of
these risks are borne by those organizations, companies and individuals.
d. Market intelligence function – job of collecting, interpreting and disseminating the
large variety of data which are necessary to the smooth operation in the marketing
process.
Marketing decisions should be based on reliable information. Market intelligence refers to
the process of collecting, interpreting, and disseminating information relevant to marketing
decisions. Its role is that it reduces the level of risk in decision making. Through market
intelligence the seller finds out what the buyer needs and wants. Marketing research helps establish
what products are right for the market, which channels of distribution are most appropriate, how
best to promote products and what prices are acceptable to the market.

Intelligence gathering can be done by the seller, government agency, the ministry of
agriculture, or some other concerned organization.
e. Market research – undertaken to evaluate the possible alternative marketing channels
that may be used.
f. Demand creation – it usually achieved through effective advertising of the product
and other promotional devices.

Uses of Functional Approach

a. It considers the job which must be done.
b. It is helpful in evaluating marketing cost of various middlemen.
c. It is useful in understanding the differences in marketing costs of various commodity.
d. It aids in efforts to improve the performance of the marketing machinery.

D. The Market Structure-Conduct Performance Approach

This approach refers to the study of behavior of firms, institutions and organizations, which
exist in the marketing system. It tries to answer the question how does the market or marketers
behave and perform. The marketing process is continually changing in its organization and
functional combinations. An understanding of the behavior of the individuals is essential if changes
in the behavior and functioning of the system are to be predicted.
 Under this approach, marketing firm is considered as a system of behavior and the
emphasis is on “how” change occurs. This approach views marketing as a system within which
subsystems are interrelated and interacting each other. And the operation of the system is the results
of the interrelationship and interactions of the subsystems.
The behavioral system approach thus studies the behavior of each subsystem and predicts
its implications to the main system. The point of interest is the people who are making decisions
to solve particular marketing problems.
This approach tries to answer the following questions:

• Can changes be made in the marketing system to lower the price to consumers?
• Are producers/manufacturers responding to the needs of the consumer?
• Are producers receiving an “adequate” return on their investments?
• Are traders‟ abusing their market power or providing incorrect market information?

1. Market Structure – refers to how a market is organized with particular emphasis on the
characteristics that determine the relationship among the various sellers in the market,
among various buyers, between sellers in the market. It deals with the organization of
market as it influences the nature of competition and pricing within the market structure:
a. The degree of buyer and seller concentration
b. The degree of product differentiation
c. The condition of entry to the market
d. The degree of knowledge of the market

• Purely competitive market – is one where the number of buyers and sellers is
sufficiently large so that no individual can perceptively influence price by his
decision to buy or sell. The product is sufficiently homogeneous so that the products
of one firm is essentially a perfect substitute for that of another firm.
• Absolute monopoly – type of market structure with a single seller.
• Monopolistic competition – refers to market in which a large number of sellers
offer differentiated products.
• Oligopoly – refers to a market with a few large sellers.
• Monopsony – market with a single buyer

2. Market Conduct – refers to the way firms adjust to the market in which they are engaged
as buyers or sellers. Behaviors and patterns that the firm exhibits in the market.
3. Market Performance – is the appraisal of how much the economic resource of the
industry’s market behavior or conduct.

Meaning of Price

Utility – is the attribute of an item that make it capable of satisfying wants

Value – is the quantitative expression of the power a product has to attract other products in
exchange

Price – It is the “price of a good or service is what it costs the buyer to acquire it from the seller;
the same price is what the seller rewards for giving up its property rights on the good or service”.
 It is the amount of money (plus possibly some goods) which is needed to acquire in
exchange some combine assortment of a product and its accompanying services.

Particular classes of goods or services have explicit price name, e. g. wage as the price of
labor, interest rate as the price of capital, discount rate as the price of time, risk premium as the
price of uncertainty, etc.

Economic Role of Price

In both command and communist systems, it is the government which decides what to do
and where the resources should go. However, this is not the case for a market economy. It is the
price which determines how much of each resource is used where.
In a market economy, a change in market forces (supply and demand) changes the market
price. Price change also affects incentives and incorporates information for market participants.
For instance, increase in price of a good in the market offers producers an incentive to produce
more as they get more profit. Thus, producers try to take advantage of higher prices by producing
more.

Price Determination
Price Determination in a Perfectly Competitive Market

• In a perfect market, prices serve the dual role of informing producers of consumers
wants and of varying conditions of production. Price is determined purely by supply
and demand with the only price differentials in time, location and form of the product.
• Market price is determined by forces of supply and demand.
Effects of Changes in Supply and Demand on Equilibrium

Price will tend to rise in response to the following:

a. Demand increase with no change in supply
b. Supply decrease with no change in demand
c. A higher price will occur when supply decreases and the demand increases
simultaneously

Price will tend to fall in response to the following:

a. Demand decreases with change in supply
b. Supply increases with change in demand
c. A relatively large decline in price will occur if supply increases and demand decreases
simultaneously
Types of Price Fluctuations

A. Seasonal Price Variations

• They tend to follow a more or less inform pattern within the year and are observed to
confirm to this pattern over a period of years.
B. Annual Price Variations
• Methods of price determinations under pure competition can be applied directly to
explain year-to-year product price variation. The demand and supply functions may be
viewed as representing annual averages with annual price changes arising from the
shifts in these functions.
C. Trends
 • Trends in agricultural prices are associated with general inflation and deflation in the
economy and with factors specific to agricultural products. These include changes in
the taste and preferences of consumer, increase in the production and income and
technological change production.
D. Cyclical Price Variations
• Some farm price fluctuates in rather regular patterns.
E. Random or Irregular Movement in Prices
• These are variation in prices which lack any definite or systematic pattern and may be
said to “just happen”.

Operational Aspects of the Pricing Process

A. Individual negotiation is but a simple bargaining between individual buyers and sellers
for each transaction.
B. Organized Market

1. Commodity Exchanges – the exchanges provide a site for trading to take place under
specified rules.
a. Spot or cash market – which involves trading in actual commodities, normally on
the basis of samples.
b. Future contracts – specify the minimum grade or particular grades of a commodity
which must be delivered in fulfillment on the contract at some future date.
2. Auction Markets – they appear to have been the most widely used where actual
inspection of the product is desirable to determine its quality.
3. Terminal Livestock Exchange – livestock producers cosign their animals to a
commission firm at the terminal.
4. Administered Prices – most agricultural products are sold under circumstances where
central markets do not exist and where negotiation is impractical and costly.
5. Collective Bargaining – dissatisfaction with prices determined in fully competitive
markets had led farmers to form bargaining associations though which they can
negotiate for higher prices.
Pricing Strategies

A. Manufacturer’s Pricing Strategies

1. Market Skim Pricing – this strategy is usually when manufacturer want to get the
highest possible price for his product in the short run.
2. Penetration Pricing – this type of pricing is widely used for products with a high
degree of price elasticity of demand and a production schedule that is quite subject to
major reductions with increases in volume.
3. Pre-emptive pricing – the basic idea is to set the price of the product so low that the
market is unattractive to competitors.
4. Extinction pricing – there are firms which price a product on the basis of variable
costs in order to force firms in weak financial or marketwise positions to discontinue
their productions.
5. Formula Pricing – this type of pricing is usually used by wholesalers. In this strategy,
the agreement is negotiated with the buyer.
6. Tie-in Pricing – wholesaler use this procedure whenever they have a large supply of
less desirable varieties or classes of product together with the limited more desirable
ones.
 B. Retailer Pricing Strategies
1. Competitive Pricing – Retailers usually set prices to be near or equal to those in other
stores for product bought on a regular or irregular basis.
2. Psychological Pricing – to get more customers while holding the present ones,
retailers’ resort to a number of psychological pricing practices. One practice is the use
of odd-centavo pricing to give the appearance of having cut prices to the base
minimum.
3. Unit Pricing – one of the effective ways of pricing to gain volume is through pricing
items in units of two or more.
4. Price Lining – it is offering two or more classes of the same products at different prices.
5. Special Pricing – major aspect of retail pricing is the determination of prices for the
items to be offered as specials each week.
Marketing Channels
It refers to an inter-organizational system made up of a set of interdependent institution and
agencies involved in the task of moving products from their point of production to point of
consumption.
Nature of marketing Channels

Marketing channels vary according to the types of commodity handled, time and location.
One product in a particular time and place will require unique setup of institutions and agencies,
assuming that is attributed through the channel system.
Producer ------------Retailer ------------Consumer
Choice of marketing Channels

1. Nature of Product
• Perishability
• Unit value
• Newness of the product
2. Nature of the market
• Consumer buying habits
• Size of average sale
• Total sale volume
• Concentration purchases
• Seasonality of sales
Marketing Channels of Selected Farm Products

1. Contract Buyers – this type of intermediaries is most prevalent in the fruits and vegetables
channels.
2. Wholesaler – these are merchant middlemen who sell to retailers and other merchants in
significant but not ultimate consumer.
3. Commission agent – these are middlemen who buy products in localized areas.
4. Assembler wholesaler – they buy from producer and contract buyers, assemble products in
large volumes and transport them to market centers.
5. Butcher retailers – these are middlemen who buy live poultry and livestock from the
wholesaler or direct from the producer and sell them in dressed or carcass form.
6. Retailer – these are product handlers who serve as the last link in the marketing channel.
 PRICING STRATEGIES
A. Manufacturer’s Pricing Strategy

1. Price skimming refers to a pricing strategy where the producers sell new, innovative, or
improvised products or services at a high price for a short period targeting high-end
customers and subsequently, reduces the price to tap remaining market segments.
Many well-known products can be considered examples of price skimming. Electronic
products – take the Apple iPhone, for example – often utilize a price skimming strategy during the
initial launch period. Then, after competitors launch rival products, i.e., the Samsung Galaxy, the
price of the product drops so that the product retains a competitive advantage.
A more recent example of price skimming is Sony’s PlayStation 5. Because it has few
competitors, this next-gen console occupies a much higher price-point. However, as more
competitors begin to launch rival consoles, the price will fall.

Inelastic demand means that when the price goes up, consumers' buying habits stay about the same,
and when the price goes down, consumers' buying habits also remain unchanged.
2. Penetration pricing refers to a pricing policy generally used by a new entrant in the
market. The product’s price is set at lower levels to gain market share and therefore
penetrate the market by attracting customers from its competitors. This pricing strategy is
usually scrapped after the company gains a satisfactory share of the market.
Penetration pricing example is the subscription streaming services like Netflix commonly use
penetration pricing. They run campaigns offering new customers a special deal, like $10 per month
for the first six months. Alongside this, they promote all their latest and most popular TV shows
and movies.

3. Preemptive pricing is selling a product at a price which is below the normal or market
price for a short period of time to boost sales, beat competition or bring awareness in
consumers. Besides, it also hinders new firms from entering that segment. Don’t be
confused between preemptive pricing and predatory pricing? Limit pricing is a preemptive
strategy used to prevent entry, whereas predatory pricing takes place after entry has taken
place.
 Predatory pricing strategy, a term commonly used in marketing, refers to a pricing strategy
in which goods or services are offered at a very low price point, with the intention of driving out
competition and creating barriers to entry. In contrast to loss leader pricing, predatory pricing is
aimed toward setting prices low for an extended period, long enough to, hopefully, drive the
competition out of the market.
Example. In 2001, Air Canada faced allegations of predatory pricing against two smaller
competitors (WestJet and CanJet) by Canada’s Commissioner of Competition. Air Canada
introduced special fares to match competitor’s prices of $89 to $99 for one-way travel from Halifax
to St. John’s, Montreal, or Ottawa. In the past, the airline had priced such flights at more than $600.

4. Extinction pricing strategy is a strategy of driving away existing competitors by setting a

low price that makes the business of competitors unviable.
5. Tie-in pricing is a form of price discrimination where one good, called the base good, is
tied to a second good, called the variable good.
For example, the printer (the base good) is often relatively cheap whereas the ink (the variable
good) has a high markup, and eventually costs you far more than what you paid for the printer.
Other examples include cell phones and data plans or the Kindle Fire and the accompanying
books or music you purchase from Amazon. The base good is sold close to marginal cost, and the
variable good is sold at above marginal cost. Digital goods and preloaded software, as well as
bundles or services. Preloaded software, on the other hand, is software preloaded onto your
computer by the manufacturer.

B. Retailer Pricing Strategies

1. Competitive pricing is a strategy where a product's price is set in line with competitor prices.
Also called competitor-based pricing, competition-based pricing, competition-oriented
pricing.
A real-life example is Amazon's pricing of popular products. The retail giant gathers
competitive price intelligence and utilizes it to offer the cheapest price in the market.
Examples of competition-based pricing methods include:
Company A lowers its price below that of Company B, to steal market share.
Company A raises its price above that of Company B, to premium price itself as a higher quality
option.
Company A matches the price of Company B, to stay competitive.
2. Psychological pricing can also be described as setting prices lower than a whole number —
for example, $3.99 is perceived as “cheaper” than $4. The idea is that customers will perceive
the slightly lower price as a deal and be motivated to make the purchase.
A typical example is prices that end with nine, such as P599. Here, the left-digit bias influences
one's perception. Consumers perceive a product's price by reading it from left to right. So, if a
product is priced at P599, a consumer may round it down to P500 instead of P600.
Charm pricing. One of the most common examples is ending a price in 9 or 5. ...
Prestige pricing. ...
BOGOF (Buy one, get one free) ...
Artificial time constraints. ...
Bundle deals. ...
Flash sales. ...
Price matching.

3. Unit pricing is a way to compare similar products to find the best value. For example, carrots
are available in different forms: full-sized and baby carrots. They are also available in different
sized bags. Figuring the unit price can help you determine which carrots are the best value.
What is an example of a unit price? To find the unit price, add the variable cost per unit and
the contribution margin per unit. For example, if a textbook has a variable cost per unit of $50 and
a contribution margin per unit of $35, the textbook's unit price is $85.
Some examples of standard units are:
Beef: price per kilogram.
Laundry detergent: price per liter.
Avocados: price per avocado.

4. Price lining, also referred to as product line pricing, is a marketing process wherein products
or services within a specific group are set at different price points. The higher the price, the
higher the perceived quality to the consumer.

For example, many cell phone providers offer the same phone at different prices depending on
its features. For example, a phone with a basic camera is likely to have a lower cost than the same
phone with a camera of better quality.

5. Special pricing is an agreement offered jointly between a manufacturer and a distributor to

supply products to a defined market segment at a specially reduced price. This includes
discount pricing is a type of promotional pricing strategy where the original price for a product
or service is reduced with the aim of increasing traffic, moving inventory, and driving sales.

6. Premium or prestige or image pricing - a strategy where businesses price a product higher
than the market average to strengthen perceived quality and establish a luxury brand image.
The best examples of premium pricing are premium brands in the fashion and tech industry.
Some of the biggest names that rely on premium pricing to indicate their products are luxury goods
Rolex, Chanel, Gucci, Apple, etc. A designer shoe company announces a new line of shoes named
after a specific athlete. If the company announces a limited edition of such a shoe with a limited
production run, the shoe company may charge a premium price for the same shoe.