Analysis of Monopolistic Competition on the Example of McDonald's

Introduction

Monopoly and the blend of perfect competition is often described as monopolistic competition. These are intricated cases in the market structure and it is in fact a form of imperfect competition. Selling products in the market can be challenging due to the immense number of traders in the monopolistic competition. For instance, there are gem dealer, drive-through joint and a lot more that works in monopolistic challenge. Monopolistic competition has a stiff request curve which will give the companies to set prices as preferred. The examples of monopolistic competition can be seen almost in every business field and industry.

On counting of the demand curve, quite a number of companies have been competing and manufacturing distinguished products. The product’s quality, price and marketing of the product are also the elements that will be competed among companies. The advantage of monopolistic competition is that firms have the freedom to join and leave whenever they want to. This will lead to normal profits in the long term when supernormal profit tends to attract more firms to enter into the market. Furthermore, their assets will face low satisfactory when it comes to customers liking as monopolistic competition is allocatively and prolifically inefficient.

Examples of monopolistic competition: McDonald’s

McDonald’s faces intimidations in the fast food business as it is competing with many kinds of fast food eateries which is Burger King, Kentucky Fried Chicken (KFC), Pizza Hut and many more. This creates monopolistic competition examples worldwide. Fast food outlets of all kind are doing likewise sort of business which is offering fast food to the consumers yet give distinctive sort and various choice of fast food, for example, pizzas, burgers and some more. As a monopolistic challenge market structure, firms do have the ability to control the cost of item as the quantity of firms is huge where each firm creates a little piece of market supply and each firm is constrained in its size.

Place

The world's biggest café network said overall gain was somewhat higher at $1.27 billion in the quarter, yet hidden worldwide deals fell 1%. The organization blame a 'testing' situation, which incorporated a barbarous winter in both the US and Europe. According to BBC (2013), McDonald's is likewise going under expanding weight from its rivals. In the relatively recent past, Yum Brands, which possesses Taco Bell, KFC and Pizza Hut, has changed its US menus which are satisfying to the practical high-roller. Burger King and Wendy's have likewise revamped their contributions. McDonald's has been actively presenting its 'Dollar Menu', which numerous specialists state is eating into the organization's overall revenues. The deals and benefit figures came in lower than desires, and on Wall Street, McDonald's offers were decreased by 2%. In the US, McDonald's said that basic deals fell by 1.2% in the initial three months of the year, with working pay down 3%. Despite this, it said it had overcome the challenge and expanded piece of the overall industry. In Europe, the organisation blames on-going financial vulnerability on the region due to identical deals that fell by 1.1%, (BBC,2013).

Subsequently, it is observed that numerous fast food restaurants are competing with one another which causes strong competition in the market. This is attributable to the fact that many fast food restaurants have no obstacles for entry. Free section into the market empowers new firms to accompany close substitutes and disturb the progression of benefit making. Not only that, it benefits some of the fast food outlets to resume its business and also sustaining a normal profit in the market for a longer period of time due to the free entry and exit to the market.

Promotion

Moreover, many fast food joints have been indicating on the promoting of their item. In order for consumers to know more about the product, these fast food outlets should publicise their products as the products are diverse. Another crucial factor is the appearance of the product. The exterior of the product should be appealing to the eyes as customers will observe the product, thus, packaging of the product must be picture-perfect. According to Burkitt (2012), McDonald’s has made the initiative to portray itself as a fast-food trademark in China by proclaiming commercials in televisions. For instance, they offer '100% fresh burger' on the cleaving square, ranchers picking tomatoes from the vine and chickens eating top notch feedstuff in the ads.

During the Summer Olympics in London, Chinese TV networks publicised McDonald’s ads as they are the official sponsor and anticipate to increase the number of Chinese viewers. 'We're not out to have the most stores in China, but we want to have the highest quality,' Kenneth Chan, chief executive of McDonald's China, said in an interview, (Burkitt, 2012). According to Mr. Chan, McDonald's manages more than 1,400 stores in China and to open 250 stores, 50% of investment is increased this year from a year earlier. Last year it launched about 200 stores and McDonald's plans to have 2,000 outlets in China by the end of 2013, he said.

Due to the fast-food chains and casual-dining outlets spread out across the country, China's dining landscape has become increasingly aggressive, (Burkitt, 2012). According to Ben Cavender who is a senior analyst at China Market Research Group, in 2011, dealings within China's food-service industry jumped to 625 billion yuan ($99 billion) which is 14% higher from last year.

As said by Burkitt (2012), repeated outbreaks of at times toxic food-additive scandals and disruptions in which some restaurants were found to cook with oil composed from gutters has occurred in China. As a result, consumer do not trust the food quality in the country. According to market research firm Euromonitor International Chinese, consumers typically trust that Western food chains use safe ingredients. Be that as it may, the promotion battle comes as the business experiences expanding examination in China. McDonald's itself recently said it had never old hamburger safeguarded with ammonium hydroxide in China, as reports that the organization had restrained the embodiment in the U.S. achieved the territory.

McDonald's television advertising has been improved for making a progress in the market, industry experts say, (Burkitt, 2012). To draw attention to its chicken products, it launched a commercial on television last year, which analysts say have been overshadowed by the chain's hamburger marketing.

Pricing

Next, pricing of products is essential in most fast food outlets which are in the monopolistic competition. Every fast food restaurant must acquire a few additional outlays in the form of sales cost due to the variety of products. Hardcastle Restaurants, a renowned company has stated that after the government raised the service tax rate in February, there is a high possibility that an increment of cost would transpire by 5 to 6 percent, (Bose, 2012). According to Bose (2013), in India, consumers have lost the interest in acquiring clothes, car and eating out due to the escalating food prices, inadequate salary increases and the slowest Indian financial growth in a decade. India is a major market for overall chains with its 1.2 billion individuals, however for the time being most Indians can't adapt to pay and eat normally in western-style restaurants. The burger chain said its equivalent store deals keep on being feeling the squeeze and in spite of the fact that they would build up, the addition would not be at the 22 percent accomplished in the financial year finished March 2012, (Bose, 2013).

When McDonalds initially arrived in 1996, it has become India's biggest fast food chain operator as they provide vegetarian items like McAloo Tikki, which has a potato patty, and the McSpicy Paneer along with selling chicken and fish burgers but without its signature hamburger. This due to the local religious beliefs of which the locals do not eat beef and pork. On the word of Bose (2013), over the next 3 to 5 years, 5 billion to 10 billion rupees ($92 million-$184 million) is estimated to be spent in India, mostly for store expansion, adding India's long run utilization development story stayed in one piece. As for future plans, the company has decided to open up 80 to 90 restaurants in the west and south of India in the following years and also expecting a parity fund raising to amplify McDonalds' extension in the country.

The markets can be classified into four types of market structures:

• monopoly
• perfect competition
• monopolistic competition
• oligopoly.

Originally, economists classify markets into two extremes, monopoly and perfect competition. Numerous manufacturers that present identical products at the same price level face perfect competition. In perfect competition, only the market forces of demand and supply can control the price of products. As a result, the company has no influence over the market price as it’s a price taker. In contrast, monopoly is a single corporation that dominates the market due to the support from the government, control over a resource or legal protection.

This implies that majority of society and potential new businesses have concerns because in monopoly, they have the power of determining the market price, making high barriers to enter. Meanwhile, oligopoly is categorised under these extremes but more regarding to monopoly than a perfect competition. What makes oligopoly different is that several firms can control the market for a similar product or service but are distinguished by publicising and promotions.

Monopolistic competition is deliberated to be under these two extremes as well, but more towards the competitive part. In spite of many firms selling almost similar products, they have the control of price making in the market. Also, the entry barriers are very low, influencing more firms to join the market. McDonalds will be taken as an example to clearly describe the idea of monopolistic competition through the application of actual occasions.

McDonald which originates from America serves almost 70 million people a day with more than 34000 restaurants in 118 countries and it is one of the most successful fast food franchises in the world, (McDonald 2013). In the fast food industry, there are many other competitors as well, thus, making McDonald classified as a monopolistic competition. As an example, other fast food outlets also offer burgers and fries but are slightly differentiated from McDonald due to the way it is prepared and the taste of it. If there is a price increment of fast food in McDonalds outlets, their customers might shift to having their food at other fast food restaurants like KFC, while some loyal customers remain. This is exactly how a monopolistic competition faces a conduct of a descending inclining request bend. As cost expands amount requested reductions, while as cost diminishes amount requested increments. It is obvious that there is a converse connection among cost and amount requested for an individual firm.

Furthermore, they also have a relatively elastic demand curve. On the word of Mankiw. N. G (2004), elasticity is the degree of responsiveness to a change in price. This implies that when McDonalds made changes to the price of burgers, it effects the preferability and satisfaction of customers when it comes to fast food. Due to practically similar alternatives like Wendy's or KFC who are also known for its fast food, McDonald have to face this competition. Nevertheless, interest for McDonald isn't clearly elastic on the grounds that when cost of a cheeseburger rises, a few clients are very delicate to the value change and may change to an alternate outlet, yet not all importance to state that the loyal clients will still stay paying regardless of how much the price increases. This suggests the interest bend isn't splendidly elastic.

Short Run

In comparison to the completely elastic horizontal demand curve seen by an individual company in ideal competition, the demand curve for McDonald is downward sloping. It looks like the demand curve of a monopoly in which the company sells tiny quantities at elevated rates and big quantities of products at reduced rates. Next we'll look at McDonald's marginal revenue (MR). As far as Long. N’s (2013) is concern, marginal revenue is the amount of income each extra production receives from a company. Due to the fact that it's a single price seller, they don't have much monopoly power over the industry and it would be hard for them to discriminate price. Thus, McDonald's marginal revenue is below its curve of demand.

This implies that the companies’ marginal income at any stage of production will be smaller than the cost for which they sell their burgers. Thus, following marginal cost (MC) equal to marginal revenue's (MR) profit maximizing rule, McDonald will want to generate at an amount where MR = MC. As well as, it can charge a cost that matches the burger's requirement. We should go over MC= MR to the demand curve and over to the price axis to find the price charged by McDonald. And to determine if McDonald earns economic profit or not, we go up to the average total cost (ATC) curve and up to the price axis, so we can see that McDonald earns in economic profit.

Long Run

In a town where there are presently no fast food outlets, McDonalds could experience economic profits due to their extremely differentiated food. As one of the features of monopoly competition is low entry barriers, we would expect more fast food joints to be attracted to this town. This implies if McDonald which is one of many different outlets in the town, so it's anything but an imposing business model, it giving fast food simply like the remainder of different eateries, however, their burgers specifically are helping them gain monetary or super-ordinary.

As a result, the demand for McDonalds will decline because there is more competition in the market. It is clear that McDonalds will face elastic demand curve knowing that there are more alternatives available for customers to choose from and the number of substitutes determines the elasticity of price. This eventually effects the marginal revenue (MR) causing it to drop. MR and request are equivalent at a degree of yield of one. In this manner MR movements to one side downwards and ends up evener.

McDonald would need to deliver its burgers at the benefit incresing yield of MC=MR, however, a lower level where amount has reduced to 5 burgers from the first 10 burgers dependent on a perception which is because of fall in demand. Presently, McDonald can only charge their clients $0.5 per burger on the grounds that there is more challenge and clients are progressively receptive to McDonald costs as there are different substitutes. Therefore, we can see that McDonald can't acquire financial benefit in light of the fact that their value rises to their average total cost (ATC).

Conclusion

Assuming in the long run, McDonald should be effectively productive. Sloman. J. Wride. A, Garratt. D (2012), has expressed that, McDonald is not producing burgers at a minimum average total cost (ATC) due to the fact that marginal cost (MC) is equal to ATC at its lowest point. They are able to restrict their production and make slightly higher prices than the minimum ATC as they have the price making power, thus, not benefitting its resources in the least cost manner.

It is crucial that we study its demand which is a symbol of marginal benefit in order to scrutinise whether McDonald is allocatively efficient. To know they are allocatively efficient, the marginal benefit must be equals to the marginal cost at McDonalds profit maximizing level of output MC=MR. However, it has come to concern that marginal benefit to society is greater than the marginal cost to McDonald. This implies that McDonald is reducing its productivity of burgers. In other words, less burgers are being produced compared to the socially ideal amount to make the most of their profit.

At last, McDonald will have neither allocative or productive efficiency due to the descending inclining request bend and a negligible income that lies under interest, in addition to McDonald charges $0.5 which is higher than its base ATC. Another reason is on the grounds that it is selling its burgers higher than its minor cost implying that the assets used to deliver burgers are under allocated towards McDonald yield over the long run despite the fact that they are not gaining financial benefits.

References

1. McDonald's Corporation. (2021). 2020 Annual Report. Retrieved from https://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/2020%20Annual%20Report.pdf
2. Beasley, M. (2016). The McDonaldization of Society: An Investigation into the Changing Character of Contemporary Social Life (8th ed.). Sage Publications.
3. Bishop, M. (2019). Monopolistic Competition. Investopedia. Retrieved from https://www.investopedia.com/terms/m/monopolisticcompetition.asp
4. Gabaix, X., & Laibson, D. (2019). Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets. The Quarterly Journal of Economics, 134(1), 511-551. https://doi.org/10.1093/qje/qjy025
5. Gregoriou, A. (2020). Monopolistic Competition and the Welfare Effects of Trade Liberalization. Journal of International Trade & Economic Development, 29(3), 269-299. https://doi.org/10.1080/09638199.2019.1665826
6. Lutz, A. (2017). Why McDonald's Is One of the Most Monopolistic Companies in America. Business Insider. Retrieved from https://www.businessinsider.com/mcdonalds-is-one-of-the-most-monopolistic-companies-in-america-2017-10
7. Mises, L. von. (1990). Human Action: A Treatise on Economics (4th ed.). Fox & Wilkes.
8. Perloff, J. (2014). Microeconomics (7th ed.). Pearson Education, Inc.
9. Rosenbaum, D. (2019). McDonald's: A Monopoly in the Fast Food Industry? Investopedia. Retrieved from https://www.investopedia.com/articles/investing/030916/mcdonalds-monopoly-fast-food-industry.asp
10. Trefis Team. (2020). What Is McDonald's Business Model? Forbes. Retrieved from https://www.forbes.com/sites/greatspeculations/2020/07/29/what-is-mcdonalds-business-model/?sh=52f3dfdb149a