Chapter 7Chapter 7

Pricing and Exchange SystemsPricing and Exchange Systems

and Alternatives Within theand Alternatives Within the

Marketing-Procurement ChannelMarketing-Procurement Channel

Pricing SystemPricing System

A market mechanism or process A market mechanism or process (organized behavior) by which market (organized behavior) by which market participants discover, negotiate, or fix participants discover, negotiate, or fix prices.prices.

Net costs to buyer and seller influenced by Net costs to buyer and seller influenced by transaction costs:transaction costs: those costs incurred by those costs incurred by buyer and seller as they search for market buyer and seller as they search for market opportunities and make and complete opportunities and make and complete business deals.business deals.

Pricing SystemsPricing Systems

Price discovery systemsPrice discovery systems– Organized marketsOrganized markets– Decentralized, individual negotiationDecentralized, individual negotiation

Price-setting systemsPrice-setting systems– Firm price makingFirm price making– Group negotiationGroup negotiation– Government price settingGovernment price setting

Price Discovery SystemsPrice Discovery Systems

Price discovery: process of buyers and Price discovery: process of buyers and sellers arriving at prices for a commodity sellers arriving at prices for a commodity when market conditions do not permit when market conditions do not permit either group to set priceseither group to set prices

All market participants are individually All market participants are individually price takers or price negotiatersprice takers or price negotiaters

Usually associated with fairly equal Usually associated with fairly equal numbers of buyers and sellersnumbers of buyers and sellers

Price Discovery Systems:Price Discovery Systems:Organized MarketsOrganized Markets

Structured to give buyers and sellers Structured to give buyers and sellers access to one anotheraccess to one another

Offer free and vigorous competition Offer free and vigorous competition Also referred to as public marketsAlso referred to as public markets May be electronicMay be electronic

Price Discovery Systems:Price Discovery Systems:Decentralized, Individual NegotiationDecentralized, Individual Negotiation

Less formalized, less structured, less Less formalized, less structured, less publicpublic

Also referred to as private treaty or Also referred to as private treaty or hagglinghaggling

Convenience and lower transaction Convenience and lower transaction costscosts

Offer-acceptance systemOffer-acceptance system Formula pricingFormula pricing

Price Setting SystemsPrice Setting Systems

Prices may be set by any of three parties: Prices may be set by any of three parties: sellers, buyers, governmentsellers, buyers, government

May fail to equate amounts supplied and May fail to equate amounts supplied and demandeddemanded

Price making by individual firms: more likely for Price making by individual firms: more likely for differentiated products than commoditiesdifferentiated products than commodities

Group negotiation: farmers negotiating as a Group negotiation: farmers negotiating as a group with individual buyersgroup with individual buyers

Government price setting: price ceilings rare; Government price setting: price ceilings rare; price supports more commonprice supports more common

Price Systems in UsePrice Systems in Usefor Major Commoditiesfor Major Commodities

Factors on Which toFactors on Which toCompare Pricing SystemsCompare Pricing Systems

Minimization of transaction costsMinimization of transaction costs Spatial pricing efficiencySpatial pricing efficiency Level and stability of pricesLevel and stability of prices Integrity and equity of the price-making Integrity and equity of the price-making

processprocess

Contractual ExchangeContractual ExchangeArrangementsArrangements

Vertical integration:Vertical integration: ownership of ownership of contiguous stages in the marketing contiguous stages in the marketing channelchannel

Vertical coordination:Vertical coordination: firms share firms share information to improve efficienciesinformation to improve efficiencies

Marketing-procurement contract:Marketing-procurement contract: an an agreement between buyer and seller agreement between buyer and seller covering product, time/nature of delivery, covering product, time/nature of delivery, price, and other aspects of exchangeprice, and other aspects of exchange

Agribusiness MotivationsAgribusiness Motivationsfor Vertical Integrationfor Vertical Integration

Seeking or controlling product Seeking or controlling product qualityquality

Gaining efficienciesGaining efficiencies Gaining market securityGaining market security

Farmers’ MotivationsFarmers’ Motivationsfor Vertical Integrationfor Vertical Integration

Separating pricing decision from time Separating pricing decision from time of deliveryof delivery

Shifting price risks to contractorShifting price risks to contractor Improves access to marketImproves access to market

Characteristics ofCharacteristics ofProduction ContractsProduction Contracts

Allocation of valueAllocation of value Allocation of decision rightsAllocation of decision rights Allocation of riskAllocation of risk

Marketing-Pricing AlternativesMarketing-Pricing Alternatives(Storable Commodities)(Storable Commodities)

Timing of pricingTiming of pricing Timing of deliveryTiming of delivery Timing of saleTiming of sale ContractingContracting Forward pricing in cash or futures Forward pricing in cash or futures

marketsmarkets PoolingPooling

Characteristics ofCharacteristics ofMarketing-Pricing AlternativesMarketing-Pricing Alternatives

Class ExerciseClass Exercise Using the commodity assigned in Chapter 1 and Using the commodity assigned in Chapter 1 and

the agribusiness chosen in Chapter 2, discuss to the agribusiness chosen in Chapter 2, discuss to what degree the agribusiness is involved with what degree the agribusiness is involved with controlling the agricultural marketing system. controlling the agricultural marketing system. Discuss these characteristics:Discuss these characteristics:– Degree of marketing system controlDegree of marketing system control– CapitalCapital– LocationLocation– Corporate philosophyCorporate philosophy– Quality Quality