THEORETICAL BASIS
Theoretical Framework
The Structure-Conduct-Performance (SCP) paradigm, introduced by economists Edward Chamberlin and Joan Robinson in 1933 and further developed by Joe S Bain, is a key model in Industrial Organization Economics It provides a theoretical framework that explains how firm performance is influenced by market structure and economic conduct, particularly in incomplete markets.
The Structure - Conduct - Performance (SCP) Paradigm comprises of three major elements:
Structure refers to market structure The variables that are used to describe market structure include seller concentration, degree of product differentiation and barriers of entry.
Conduct encompasses a firm's behavior, which can be assessed through various factors such as pricing strategies, collusion, advertising, research and development, and capacity investment It is often interpreted in terms of whether firms engage in collusion or competition.
Performance refers to outcome or equilibrium assessed in terms of allocative efficiency The variables mostly used to measure performance are profitability and pricecost margin.
The SCP paradigm posits specific causal relationships between market structure, conduct and performance In particular, market structure determines conduct and conduct in turn determines performance:
The SCP approach assumes that there is a stable, causal relationship between the structure of an industry, firm conduct, and market performance Since this relationship is assumed
To ensure stability, it is commonly assumed that there is a direct link between observable structural variables and market performance The primary objective is to establish relationships between these structural variables and market performance that are applicable across various industries A typical Structure-Conduct-Performance (SCP) analysis involves defining a market performance measure and identifying observable structural variables that account for differences in market performance between industries The focus of market performance analysis has predominantly been on the exercise of market power, with structural variables often measured by seller concentration and barriers to entry.
The typical SCP study involves estimating the following equation: πi = α + β1CONC + β2B.Ei1 + β3B.Ei2 +ããã+ βN+1B.EIn + ii = α + β1CONC + β2B.Ei1 + β3B.Ei2 +ããã+ βN+1B.EIn + i
The equation πi = α + β1CONC + β2B.Ei1 + β3B.Ei2 + + βN+1B.EIn illustrates how market power in industry i (πi) is influenced by seller concentration (CONC) and various barriers to entry (B.Ei) specific to that industry.
Econometric techniques play a crucial role in estimating the coefficients of structural variables, known as betas (β’s), which reflect the impact of marginal changes in these variables on market power For example, β1 indicates the increase in market power linked to a slight rise in industry concentration According to the a priori Structure-Conduct-Performance (SCP) hypothesis, it is expected that each beta should be positive and statistically significant, highlighting the relationship between structural variables and market power.
Market share is the proportion of a particular business in the total consumption or output of a market Market share data are used to calculate the concentration of sellers in a market.
Market share = sales of firm / total market sales or
Market share = Number of products sold by the firm / Total market consumption products.
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Besides, we also consider relative market share:
Relative market share = Firm’s sales share / Competitor's sales share or
Relative market share = Number of products sold by firm / Product number sold by its competitor.
If the market share is relatively larger than 1, then the competitive advantage belongs to the business.
If the relative market share is less than 1, then the competitive advantage belongs to the competitor.
If the market share is relatively equal to 1, then the competitive advantage of the business and its competitors are the same.
Investors and analysts closely observe fluctuations in market share as these changes indicate the competitiveness of a company's offerings When the overall market for a product or service expands, a company that retains its market share can expect its revenue to rise in tandem with market growth Conversely, a company that successfully increases its market share will experience revenue growth that outpaces its competitors.
Expanding market share can enable a company to operate on a larger scale and enhance its profitability Companies often pursue this goal by lowering prices, implementing effective advertising strategies, or launching innovative products Furthermore, targeting new audiences or demographics can also contribute to an increase in market share.
There are several common methods to increase market share:
Innovation is a key strategy for companies aiming to boost their market share By introducing new technologies that competitors have not yet released, businesses can attract consumers eager to adopt the latest advancements This often leads to customers switching from their previous providers, resulting in a loyal customer base for the innovative company.
8 download by : skknchat@gmail.com which adds to the company's market share and decreases market share for the company from which they switched.
Strengthening customer relationships is essential for companies to maintain their market share and prevent customers from switching to competitors Satisfied customers often share their positive experiences with friends and family, leading to new customer acquisitions through word of mouth This organic growth strategy not only enhances market share but also boosts revenues without incurring additional marketing costs.
Companies that dominate their industries typically employ the most skilled and committed workers, which helps lower turnover and training costs This allows businesses to allocate more resources to their core competencies To attract top talent, offering competitive salaries and benefits is essential, but modern employees also prioritize intangible perks like flexible schedules and relaxed work environments.
Acquiring a competitor is one of the most effective strategies for increasing market share, as it allows a company to access the acquired firm's customer base while simultaneously reducing competition Savvy executives, whether leading small businesses or large corporations, remain vigilant for advantageous acquisition opportunities during periods of growth.
These methods are also applied in the Iron and Steel market in Vietnam, leading to intensive competition among Iron and Steel corporations.
In economics, market concentration is a function of the number of firms and their respective shares of the total production (alternatively, total capacity or total reserves) in a
9 download by : skknchat@gmail.com market Industrial organization attempts to identify the factors that influence or determine seller concentration
The Herfindahl-Hirschman Index (HHI) is a widely recognized metric for assessing market concentration It is determined by squaring the market share of each competing firm within a market and then adding these squared values together.
HHI (Where Si is the market share percentage of firm i)
The Herfindahl-Hirschman Index (HHI) ranges from 0, indicating perfect competition, to 1, representing a monopoly, with higher values signifying greater market concentration and reduced competition One of the key benefits of the HHI is its straightforward calculation, requiring minimal data However, its simplicity is also a major drawback, as it overlooks the complexities of different markets, making it challenging to provide an accurate evaluation of competitive or monopolistic conditions.
The concentration ratio is an economic metric that measures the size of firms within an industry relative to the entire market A low concentration ratio signifies higher competition among firms, while a ratio approaching 100% suggests the presence of a monopoly, indicating limited competition in that industry.
The concentration ratio is a key metric that reveals the structure of an industry, highlighting whether it is dominated by a few large firms or consists of many smaller ones The four-firm concentration ratio, which measures the market share held by the four largest companies in an industry as a percentage, is widely utilized to assess market concentration In a similar manner, the eight-firm concentration ratio provides insights into the market share of the top eight firms, further illustrating the competitive landscape.
Descriptive analysis of food processing industry
The food production industry is classified under the processing and manufacturing sectors, as outlined in Decision No 27/2018/QD-TTG issued by the Prime Minister on July 6, 2018 This decision, which became effective on August 20, 2018, establishes the System of Economic Sectors in Vietnam.
The food manufacturing and processing industry group includes:
Processing and preserving meat and meat products: Slaughter of cattle and poultry, Processing and preserving of meat, Processing and preserving of meat products.
Processing and preserving aquatic products and aquatic products:
Processing and preserving frozen seafood, Processing and preserving dried seafood, Processing and preserving fish sauce, Processing and preserving fish sauce products other aquatic products.
Processing and preserving vegetables and fruits: Producing juice from vegetables, Processing and preserving other vegetables and fruits.
Production of animal and vegetable oils and fats: Production of animal oils and fats, Production of oils and margarine.
Processing milk and dairy products.
Milling and flour production: Milling, Producing raw flour, Producing starch and starch products.
Manufacture of other foods: Manufacture of flour-based confectionery,
The manufacturing processes for various food products include the production of sugar, cocoa, chocolate, and confectionery items Additionally, the industry encompasses the creation of pasta and similar products, as well as the preparation of ready-made dishes and foods This sector also focuses on the production of ready-to-eat meat and aquatic dishes, ensuring a diverse range of food options for consumers.
12 download by : skknchat@gmail.com ready-to-eat food, dish production, other ready-to-eat food, tea production, coffee production , Manufacture of other foods not elsewhere classified.
Producing feed for livestock, poultry and aquatic products.
In my personal report, I use data from industry code 10402 to industry code 10740.
This article provides a comprehensive overview of various industry groups, specifically focusing on food production and processing sectors It targets businesses involved in transforming agricultural products, livestock, and aquaculture into consumable food and beverages for both humans and animals This includes a wide range of products, from meat and seafood to vegetables and dairy.
The food processing industry primarily relies on agricultural raw materials, enhancing their value through various processing techniques This not only improves the quality of products like fruits, vegetables, meat, and fish but also facilitates transportation and reduces costs associated with the consumption of agricultural goods Additionally, the industry generates valuable export products, making it a crucial sector for many countries, particularly developing nations that heavily depend on agricultural production for their economies.
In 2015, the Economist Intelligence Unit (EIU) reported that Vietnam's total personal and household consumption reached $127.7 billion, with food, beverages, and tobacco expenditures accounting for $55.3 billion, or 43.3% of the total This indicates a promising outlook for the food processing industry in the coming years Furthermore, from 2016 to 2020, food and beverage consumption is expected to grow at rates between 3.8% and 4.3%, suggesting a favorable environment for attracting significant foreign investment in the food and beverage sector.
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In recent years, the food and beverage sector has seen a surge in mergers and acquisitions (M&A), leading to a diverse array of products across various segments Notably, foreign companies, particularly major players from Thailand and Korea, have capitalized on their financial strength, expertise, and technological advancements to make significant investments in Vietnam.
According to BMI, a prominent economic and financial research organization based in London, the Vietnamese food industry is projected to experience significant growth from 2016 to 2019, potentially positioning Vietnam as the third-largest market in Asia.
The report highlights three key trends in food and beverage consumption: a growing preference for clean, organic, and environmentally friendly options, with consumers increasingly willing to pay a premium for their meals In Hanoi and Ho Chi Minh City, over 86% of respondents expressed a preference for natural, organic, or seasonal products to prioritize their health and safety.
The growing trend of convenient food in small, portable packages caters to the increasing number of individuals living alone and the typical family size of 4-5 people This shift emphasizes the demand for easy-to-carry meal options that fit modern lifestyles.
Social networks and technology have transformed the dining experience for consumers, particularly among young people, through applications like Foody for discovering restaurants, deliveryNow for food delivery, and TableNow for making reservations.
The food production industry in our country is a vital sector, recognized for its competitive advantages in the international market and the unique internal benefits that our nation possesses.
Large domestic and foreign consumption market
Vietnam is emerging as a significant market for food and beverage consumption in the region, according to a 2018 report by Vietnam Report The country's demographic advantage, with over 50 million individuals under the age of 30, contributes to this potential growth.
Vietnam's macroeconomic landscape is characterized by stable GDP growth over the years, alongside a rise in disposable income among its citizens This upward trend in income is expected to drive an increase in demand for food and beverages across the country.
Vietnam's food and beverage products have garnered positive feedback from international customers due to their high quality and competitive pricing, supported by export promotion policies Notable exports such as rice, cashews, shrimp, frozen fish, and fruits have successfully entered both regional and global markets.
Abundant source of raw materials from the cultivation, husbandry and aquaculture industries: Our country has many strengths to support and develop the processing industry:
The livestock industry supplies essential raw materials like meat, eggs, and milk from animals such as cows, pigs, buffaloes, and poultry, which are vital for the canned and food processing sectors Additionally, cultivated raw materials, including perennial industrial crops like pepper, cashew, tea, coffee, and rubber, as well as food crops such as rice, sugar cane, peanuts, tobacco, and various fruits and vegetables, serve as the primary and crucial source of ingredients for the food processing industry in our country.
PROCESSING AND CALCULATING INDICATORS
Data analysis techniques
To process the 2018 dataset and calculate concentration metrics of the industry, I do the following steps:
Step 1: Use Stata to open the file 2018_1A_reduced (1).dta
Step 2: Use the command "tab thanh_kd" "destring ngan_kd, replace"
Step 3: Use the command "keep if nganh_kd >10401&nhanh_kd