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The I-O Model--Performance I. Performance in perspective A. In this section on performance, we will discuss:
- The steps in evaluating performance a. Defining performance dimensions (what aspects of performance are important to you) b. Defining performance norms (what is the standard against which you define good performance) c. Defining performance measures (what metric do you use to measure performance) d. Weighing overlaps and tradeoffs between performance dimensions.
- These steps involve going from more theoretically pure and general concepts of performance to the measurable and ad-hoc, which you have to deal with in reality.
- Readings for this section stress these steps: a. Brandow's overview--that of an applied policy practitioner (chief of staff of the National Commission on Food Marketing) b. Sosnick's struggle to go from the theoretically pure to the workable and measurable c. Jesse's application--an attempt to set up concrete measures of performance. B. Define performance ( overheads and handouts )
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- Bain: "The composite end results which emerge when a group of firms pursue their respective lines of conduct." a. Focus is on those end results that affect material human welfare (as opposed to purely structural or conduct variables). b. Results are not final, but are connected via feedback loops to subsequent structure, conduct, and performance. (One type of performance in the SCP framework is a change in structure.)
- Caves: "The appraisal of how far the economic results of an industry's behavior fall short of the best possible contribution to reach particular goals."
- Brandow: "How well an industry does the things that society might reasonably expect it to do." C. Performance as what we are ultimately interested in. It is the social valuation of systems outcomes. Structure and conduct are important insofar as they influence performance and are good predictors of it. They are instruments by which performance is influenced. D. Multi-dimensional nature of performance (ref. to food system goals shown earlier on overhead)
- Beyond just P & Q outcomes of price theory
- Broadened to include dynamic as well as static aspects (cf. much of welfare
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by selling grain at less than it costs to produce it. F. Making operational statements and recommendations about performance (e.g., on a consulting mission) requires reaching some agreement on three issues:
- Performance dimensions or criteria --what outcomes types of outcomes from the industry are most important for society.
- Performance norms --what are reasonable expectations or ideals of performance against which we can measure actual industry performance? a. Traditional use of perfect competition norms in much of marketing work, and limits of these (1) Perfect competition conditions don't exist in real world (2) Static norms--don't address dynamics b. More recent use of norms from the concept of workable competition.
- Performance measures a. What scalar do you use to measure performance against norms? b. Can you aggregate these measures across dimensions into some sort of unified performance index? II. Performance Dimensions or Criteria ( Overhead; handout ) A. Similarity of lists (Jesse, table 1) B. Sosnick's 12 dimensions (Note struggle of this economist, well-schooled in 1st-
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and 2nd-best solutions, to come up with workable dimensions and norms for performance--lots of qualifications, etc., based on economic theory and the literature)
- Production Efficiency (Need to ask "Efficiency for whom?" Whose costs and benefits are entering into the calculus? Related to equity dimension) a. Types of production efficiency (1) Technical or operational efficiency --how closely do existing firms, as a group, achieve lowest possible costs? (Note Sosnick's qualifications about defining what "lowest possible costs" are given previous sunk investments, stochastic nature of ag. production, etc.) (a) Are they large enough to capture scale economies? (b) Is there too much unused capacity? (c) Are they located to minimize transport costs? (d) Labor efficiency? i) Is there organizational slack and X- inefficiency? ii) Restrictive work rules--e.g., union contracts about who can shelve what in stores. (2) Allocative Efficiency --how effectively are resources
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b. Includes pricing efficiency--i.e.,the degree to which prices accurately and rapidly transmit changes in supply and demand to participants in the market (1) Affects allocative efficiency by inducing adjustments in consumption and production as supply and demand change. Allows matching of supply and demand and adjusts consumption to social scarcity. (2) An important aspect of this is the accurate transmittal of differential consumer demands to other actors in the system. (a) Concept of consumer sovereignty as driving the system. (b) Differential demands for different qualities of goods- -e.g., fatiness in meat; milk (move to multiple component pricing).
- Progressiveness a. Definition: The extent to which an industry is generating and rapidly adopting new technologies and new organizational arrangements that reduce costs or improve products and services relative to consumer wants. Process is invention±development±
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widespread adoption. b. The norm is how well does an industry do relative to its opportunities? c. Possible Indicators of progressiveness: (1) R & D : (a) Could measure amount of effort by R & D budget. (b) Also have to look at type of research carried out-- merchandising vs. fundamental improvements. (c) Look at impact of recent mergers on debt load of firms, with consequent reduction in R&D. (2) Prompt exploitation of new developments as opposed to suppression of them. (3) Incentives and constraints to innovation--e.g., tax incentives, patents. d. Policy issues (1) What kind of industry structure fosters progressiveness? Atomistic, oligopoly, monopoly? (see Scherer for some evidence on this--Related to Schumpeter's question of how to foster "creative destruction.") (2) Role of public sector and private sector research in fostering
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i.e., reducing transaction costs. f. Norms (1) Sellers should not suppress product inventions. (2) Sellers should not persistently offer less than the maximum quality that is available for a given cost. (3) Worthless and troublesome differences among sellers offerings should not persist. (a) Need to balance variety and costs (b) Role of grades and standards--e.g., in eggs and meat--in helping to make market more transparent and eliminate "excessive" variation. Also related to the dimension of participant rationality--i.e., participants should have the information necessary to make rational choices.
- Profit Rates a. Role of profits in a capitalistic system. A residual that serves as the: (1) Returns to management and risk taking (2) Returns to capital investment (3) Signal to guide resource allocation in the economy.
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b. Chronic excess profits represent a failure of the market system (1) Indicate too few resources are flowing into the industry (2) May be a result of concentrated market structure and high barriers to entry. (3) May have undesirable income distribution consequences (but need to view this in a dynamic sense--e.g., about 30 % of Kellogg's profits go to Kellogg Foundation) c. Chronic sub-normal profits may indicate a sick or declining industry. d. Definitional and measurement problems (1) What is "chronic"? Periods of high or low profits are necessary to help guide resource allocation in the economy. (a) Periods of high and low profits therefore indicate that the market is working well. Problem arises when resource allocation does not change in response to these high or low profit rates. (b) Also want rewards for innovation and risk-taking. (c) Need long period of observation for to get "average" profit rates for risky businesses--e.g., studies of marketing in LDCs, based on case study snapshot
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by their social opportunity cost. I.e., the premise from welfare economics is: "a `reasonable relation' between marginal cost and product price and between value of marginal product and input price" judged in relation to other industries.
- Costs of Sales Promotion a. This is a growing issue in high-income economies, as firms and commodity groups try to expand sales and increase market share. Tied closely to product differentiation b. Types of sales promotion (1) Advertising (2) Sales force (3) Distribution practices--getting shelf space, etc. c. Advertising levels in the food industry (1) Averages about 3% of sales in food manufacturing. Ranges from <1% for meat processing to >5% for breakfast cereals and beverages. (2) Some commodity groups also advertise--e.g., beef council, eggs d. Large economies of scale in use of TV and print advertising.
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(1) Now moving to more differentiated and targeted advertising, given the proliferation of different marketing outlets, ways of reaching consumers (e.g., cable TV) and ability to identify market niches and target for them. (2) May have reduced some of the scale economies in national TV advertising, but still substantial scale in developing big ad campaigns (e.g., for movies) (3) Impact of growth of internet marketing? E.g., Virtual Vineyards? e. Types of Advertising (1) Informational messages--showing availability, prices, and alternative uses of products (a) Consumer information programs (b) More common in newspaper, magazine, and radio ads. (2) Persuasive advertising (a) Psychological appeals--to lost youth, sex appeal, status (e.g., bear ads) (b) Exaggerated explicit or implied claims for the product (Related to unethical conduct norms).
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h. Reference: James D. Shaffer. "Advertising in the Marketing Process." In Agricultural Market Analysis, edited by Vernon L. Sorenson. East Lansing: Bureau of Business and Economic Research, Graduate School of Business Administration, Michigan State University, 1964.
- Unethical Practices a. Use of pejorative term shows per se that such things are undesirable--Norm is obviously that they should not occur. b. Examples (1) Undisclosed danger--related to food safety (2) Fraud and misrepresentation--related to advertising (3) adulteration c. What is ethical is culturally determined, which poses problems when different cultures try to trade, either within a country (e.g., across ethnic groups) or internationally. E.g., U.S. Foreign Corrupt Practices Act.
- Participant Rationality a. Norm: "Participants in the market should have a reasonable opportunity to be well informed and should exercise freedom of choice rationally in their own interests (except when private
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advantage obviously conflicts with social welfare)." b. Deals with adequate market info. to make rational choice and avoidance of misinformation. The need to provide market participants with a reasonable opportunity to make comparisons may require certain mandatory coordination and impartial types of information. E.g., (1) Inspection (2) Grading (3) Standards of identity (4) Standardized containers and packing (truth in packaging law) (5) Standardized quotations (e.g., unit prices, standard mileage estimates) (6) price posting (7) market news (8) product tests c. If this assumption is violated, then can't expect unfettered market to lead to efficient resource allocation (violation of perfect knowledge assumption). Also may discourage adoption of socially useful technologies (e.g., fertilizers) due to fear of being tricked.
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c. The norm: "No obviously and grossly excessive amount of uncompensated injury or an obviously and grossly insufficient amount of uncompensated benefit."
- Labor Relations a. Covers equal opportunity, working conditions, wage levels and wage structure, work rules b. Norm includes fair treatment (no race, sex discrimination), mutual fair treatment, reasonable communication and respect. C. We could re-group these performance dimensions in many different ways.
- Note that many of Sosnick's norms (e.g., labor relations, external effects, participant rationality, unethical practices, etc.) could be grouped under the broad rubric of equity (fairness), which is often cited as a performance dimension (N.B. equity is not the same as equality.) a. How should the benefits flowing from the industry or system be shared among participants? E.g., (1) Stockholders vs. management vs. employees vs. customers within a corporate system. (2) Differential impacts on consumers. E.g., in food distribution systems, treatment of poor vs. rich: (a) Do the poor pay more for food? Retailing studies
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often show this. (b) Do subsidies and tax breaks favor the rich? (both consumers and producers, in both industrialized and low-income countries) (c) Who has access to credit and technical assistance (small vs. large entrepreneurs)? (3) The position of farmers in the system (a) They receive a residual payment, by definition. (b) Are they relatively disadvantaged due to lack of market power? (c) What is condition of small vs. large farmers? (d) Are there problems of chronic excess production and low incomes? If so, why?
- Possible measures? a. Income levels and stability b. Prices? c. Access to supporting services? D. It is relatively easy to make lists of criteria. Trick is to go from laundry lists of performance dimensions to meaningful norms. E. Performance Norms
