Analyze the fast food industry from the point of view of perfect competition. Include the concepts of elasticity, utility, costs, and market structure to explain the prices charged by fast food retailers. Firms within the fast food industry fall under the market structure of perfect competition. Market structure is a classification system for the key traits of a market. The characteristics of perfect competition include: large number of buyers and sellers, easy entry to and exit from the market, homogeneous products, and the firm is the price taker.
Many fast food franchises fit all or most of these characteristics. Competition within the industry as well as market supply and demand conditions set the price of products sold. For example, when Wendy’s introduced its $. 99 value menu, several other companies implemented the same type of changes to their menu. The demand for items on Wendy’s value menu was so high because they were offering the same products as always, but at a discounted price.
This change in market demand basically forced Wendy’s competition to lower prices of items on their menu, in order to maintain their share of the market. The previous example illustrates the elasticity of the fast food industry. Supply and demand set the equilibrium price for goods offered by franchises within the industry. Competitors of Wendy’s must accept the prices established by the consumer demand for the value menu. If consumers didn’t respond so positively to Wendy’s changes, other firms wouldn’t have had to adjust prices.
On the flip side of this concept, there is no need for franchises to further reduce prices below the current levels. At the current prices, firms may sell as much product as they want, thereby maximizing profits. This industry has a very high utility value. Utility is a measure of satisfaction or pleasure that is obtained from consuming a good or service. If consumers feel as if they get a good meal, at a good price, then they’re satisfied. This customer satisfaction coupled with relatively low prices keeps the industry profitable.
Another quality of perfect competition that may be overlooked, but is vital to this industry is the ease of entry into the market. Start-up franchises within this market structure can begin operating with relatively low initial investments (compared to other industries). This is not the case where monopolies are concerned. There are numerous barriers to entry into monopolistic market structures, capital being one of the most prominent barriers. If a new franchise an offer the consumer a quality product at a reduced price, then the chances of success are greatly increased.
For example, Chanello’s and Little Caesar’s offer discounted pizza prices, and maintain the same quality as other pizza chains. These companies spend less on advertising and more on the actual product. That’s a very important concept in this industry, because their quality product at this discounted price gives them a niche in the market. Once a company establishes a niche, they become more visible to the consumer, thereby creating more demand, which leads to greater revenue.