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Monopolistically Competitive Markets

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Question:

Write a Report on Pricing Stategy of your Choosen Company.
 
 

Answer:

Introduction

Economic analysis is quite important in pertaining the prising strategies that are to be associated by a firm. It helps the firms to arrive at the proper execution of strategies, thereby maintaining their business in the market. The pricing  strategies associated to a firm depend upon its competitive market. The magnitude of competitiveness in the market helps in analysing the policies and the plans to be executed, under which the particular referred firm would survive in the market (Nikaido 2015). In order to analyse the market, it is quite necessary to understand the type of market in which the firm prevails. There are two forms of market, namely, perfect competitive market and imperfectly competitive. Each market has its own attributes depending upon which the optimum price in the market is charged. In order to analyse the pricing strategy of such market, in this report the case of monopolistically competitive market have been taken into consideration. Monopolistically competitive markets are a type of imperfectly competitive market, where each firm has close substitutes to each other (Haaland and Venables 2016). To analyse the market in an extensive way, McDonalds have been chosen s the appropriate firm to be taken into consideration.

The framework of the report has been divided into subparts, where the next section deals with the background of the company. It provides the details of McDonalds regarding its products and the competitors in the market. Following that section is the economic analysis, where the attributes of the company has been explained related to the monopolistically competitive market. The demand curve analysis is stated for that particular firm followed by the pricing strategies faced by the firm. This would help in deriving the optimum price in which the company must sell its products.

 

Background of the Company

Company Background - McDonalds is one of the oldest fast food chain originated in America since the year 1940. The organization has done business internationally with its wide varieties of food products. McDonalds has extensive fast food products to be offered to the consumers, where it faces a favourable demand among them. The firm has been quite flexible with the change in the habits of the consumers. In response to the changing tastes of the consumers, it has adopted new products along with its old ones. This has provided the consumers to select from a wide range of product to be offered by the company.

Business Objectives – the business objective of mcdonalds is to be the favourite place for the consumers in the fast food industry. In order to achieve this aim they have created a global strategy plan. This global strategy plan is called the “the plan to win”. This plan focuses on creating customer experience. Mcdonald’s has a total market share of 21.7% worldwide, in the fast food industry. The annual sales for the year 2016 were 24.62 billion for the organization globally.

Competing Companies - Being in the fast food chain business internationally, McDonalds faces tough competition from numerous other organizations such as, burger king, KFC, pizza hut and wendy’s.  These firms are equally popular among the consumers worldwide as mcdonalds.

Competing Products- being in the fast food industry, all the products of the firm are quite  competitive in nature. all the competitors of the firm sell products that are closed substitutes of each other.

 


Company Strategies - in order to attain the objective of the firm, mcdonalds implements various pricing strategies that would help them in obtaining a sustained price for its products. This price would help the firm in giving a tough competition to its competitors and maintaining the demand for the products among the consumers. McDonalds aims at spreading its business worldwide and gaining the market power in the competitive environment. The organization would be successful in attaining its aim by following the pricing strategy schemes associated to the market in which its prevails (McDonalds.com 2017).

Economic Analysis

Demand Curve

Among the various competitive products that are produced in the firm, one of the most popular items among the consumers of mcdonalds is their happy meal boxes. Happy meals are considered as one of the most economical products of the organization that would enable the consumer in choosing many products rather than one. McDonalds uses the strategy of product binding in order to increase their sales of various products as one.

Real product data – the happy meal product of mcdonalds consists of choice of certain products in a box. It focuses the small children who come to their stores. The choice of the product ranges from country to country. This product has been introduced in the year 1979.

Mix of competing and own product volume – happy meals of mcdonalds is considered as one of the most vital products of the company that accounts for almost 10% of their revenue. On looking at the popularity of the product, other competitors like burger king has also launched their own happy meal bags. Yet, the popularity of the product has not been able to reach the peak as mcdonalds. In order to attract the customers, the competitors have been successful in maintaining a low price approach.

Public data- the demand for happy meals has reduced to a certain extent due to the availability of cheaper competitive products in the market that is equivalent to the level of the referred product.

Conversations with experts- on conducting the research work, it is quite vital to attain knowledge from the managerial heads of the firm. the managerial heads has stated their costs of production, fixed and variable costs associated with the product, along with the current prices charged on the product. this has provided with ample information regarding the pricing structure of the firm.

 


The demand curve faced by the monopolistically competitive market is downward sloping. Hence, it could be stated that the demand curve of McDonalds is downward sloping in nature. The demand curve of the firm supports the law of demand. According to the law of demand, as the price of the product increases, the quantity demanded of the product decrease, whereas, as the price of the product falls, its quantity demanded increase, other factors affecting demand remaining constant. The slope of the demand curve faced by McDonalds has several implications (Parenti, Ushchev and Thisse 2017).

McDonalds, being a monopolistically competitive firm, aims at maximising its profit when they produce at a level where the marginal costs equals the marginal costs of the firm. With a negatively sloped demand curve, there are chances for the prices to change thereby exceeding the marginal costs (Blanchard and Kiyotaki 2017). This reduces the consumer surplus of the products in the short run. The downward sloping demand curve faced by the firm can be shown in figure 1 below.

Pricing Strategies   

Price

Demand

(billion)

Revenue

(billion)

Fixed Cost

(billion)

Variable Cost

(billion)

Profit

(billion)

$4.5

80

$360

$50

$162

$148

$4

100

$400

$50

$200

$150

$3.5

120

$420

$50

$270

$100

$3

140

$420

$50

$310

$60

$2.5

162

$405

$50

$350

$5

For a company like McDonalds it is quite essential to set a price of their product that would generate them long run stability. Hence, the price must be set at such a place where they could incur normal profit in the long run. The organization should be efficient enough to compete with the rivals in the market. This would provide them with the incentive of capturing the market and generating sales of their products throughout. Higher prices would make them less competent in nature as there are many more fast food restaurants present around the globe (d'Aspremont, Gabszewicz and Thisse 2013). The pricing strategy to be followed by the firm should be quite efficient in grabbing the attention of the consumers and maintain the loyalty of the consumers towards themselves. Depending upon the table provided above it could be stated that the maximum profit that could be attained would be at the price level $4 per meal pack. Yet, the demand at such a price is quite low for the company. Hence, in order to attain the level at which both the company’s profit and the demand for the products could be optimum would be field at $3.5.

 

Conclusion

Monopolistically competitive firms are the one who produce goods that are close substitutes of each yet, with some form of product differentiation in them. This provides them with the incentive to charge the price for their product depending upon their market power. Depending upon the demand criteria for the happy meals of mcdonalds and the pricing strategies depending upon such demand values, it could be stated that the maximum sales of the organization would be attained at a point where the price of the product would be the minimum, i.e., $2.5. Yet, this point would not be efficient enough to generate the maximum revenue for the company. The price where mcdonalds would attain the maximum revenue would be fixed at $4. It could be stated that the price point for the firm to attain the minimum cost would be when they would be generating the least products in the market due to decreased demand rate. In order to attain the optimum prevailing price for the products, it could be stated that the organization must choose $3.5 as the appropriate one. At this price the revenue earned by the firm would be $420 billion, where as their cost would be $320. It would help the organization in achieving a profit of $100 billion, which would be lesser than the profit could have been achieved with greater prices fixed yet, they would attract the demand for the products.

 

References

Bertoletti, P. and Etro, F., 2016. Monopolistic competition when income matters. The Economic Journal.

Blanchard, O.J. and Kiyotaki, N., 2017. Monopolistic competition and the effects of aggregate demand. The American Economic Review, pp.647-666.

d'Aspremont, C., Gabszewicz, J.J. and Thisse, J.F., 2013. On Hotelling's" Stability in competition". Econometrica: Journal of the Econometric Society, pp.1145-1150.

Dixit, A.K. and Stiglitz, J.E., 2017. Monopolistic competition and optimum product diversity. The American Economic Review, 67(3), pp.297-308.

Haaland, J.I. and Venables, A.J., 2016. Optimal trade policy with monopolistic competition and heterogeneous firms. Journal of International Economics, 102, pp.85-95.

McDonalds.com. (2017). About Us: McDonald's Facts and Story | McDonald's. [online] Available at: https://www.McDonalds.com/us/en-us/about-us.html [Accessed 11 Mar. 2017].

Nikaido, H., 2015. Monopolistic Competition and Effective Demand.(PSME-6). Princeton University Press.

Nocco, A., Ottaviano, G.I. and Salto, M., 2014. Monopolistic competition and optimum product selection. The American Economic Review, 104(5), pp.304-309.

Parenti, M., Ushchev, P. and Thisse, J.F., 2017. Toward a theory of monopolistic competition. Journal of Economic Theory, 167, pp.86-115.

Spence, M., 2016. Product selection, fixed costs, and monopolistic competition. The Review of economic studies, 43(2), pp.217-235.

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