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Fast Food Oligopolies.

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Georgi Byrne-Watts

on 25 November 2013

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Transcript of Fast Food Oligopolies.

Barriers To Entry?
Could be argued that the barriers for entry are low for the fast food industry. Meaning that a new competitor is always on the horizon. Consumers make their purchasing decisions based on price and convenience, meaning the buyer has purchasing power. Suppliers also have bargaining power. With the higher energy and oil prices, commodities like corn and wheat have had an increase in prices as well.
Price Leaders.
The restaurant industry is known for yielding low margins that can make it difficult to compete with a cost leadership marketing strategy. McDonald's has been extremely successful with this strategy by offering basic fast-food meals at low prices. They are able to keep prices low through a division of labor that allows it to hire and train inexperienced employees rather than trained cooks. It also relies on few managers who typically earn higher wages. These staff savings allow the company to offer its foods for bargain prices.

The company with the most market share is usually the price leader as they have the biggest influence in the market. In terms of the fast food market, McDonalds usually sets prices which other companies then base their own pricing on.
McDonald’s started a price war with Starbucks as Starbucks has expanded as a growing chain. In 2008, during the pit of the recession McDonald’s lowered coffee prices even more to compete with Starbucks. Using 100 million dollars McDonalds has improved the quality of the coffee yet uses automated machinery to quickly produce higher quality coffee. McDonald’s coffee costs $ 2.39 while Starbucks costs $2.80. Convenience is a huge factor in the busy lives of people today. Money is lost in the eyes of people for time lost. There are more McDonalds drive throughs than Starbucks so it easier to grab coffee at the McDonald’s drive through. Further, coffee at McDonald’s often involves less time to prepare than Starbucks so for someone in a hurry and who just wants caffeine McDonald’s offers the speedy preparation.
Collusion?
Collusion can be defined as an agreement, usually secretive, which occurs between two or more company's to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by
law typically involving fraud or gaining an unfair advantage.
An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market.

The fast food industry is perfect example of a market in which certain brands have a large proportion of market share. The main restaurants associated with fast food are McDonalds, Burger King, Subway and KFC. These are the competitors with the most market share but there are also smaller companies within the market such as 'Spud U Like', Upper Crust or Wimpy's, all of which are fast food chains which do not have as much recognition or market share as the main brands.

The fast food market is fairly concentrated with 12 companies taking up 71% of the market share.
The concentration ratio is 12:71.
What is an oligopoly?
Fast Food Oligopolies.
The economics of the fast food industry:
http://www.socialistalternative.org/publications/fastfood/ch3.html
Practices that count as collusion include:
• Uniform prices
• A penalty for price discounts
• Advance notice of price changes
• Information exchange

The fast food and restaurant industry has many barriers to entry. There is a saturation of restaurant businesses in the market. It will be extremely hard to compete against well known food places like McDonalds and KFC. Another significant barrier would be customer loyalty. There are thousands of people all over the work who practice customer loyalty to places such as Burger King, McDonald’s, and Subway.To start a restaurant, it can be expensive entry cost and capital costs when all land/labour/resources are bought. There are also government regulations and licensing that need to be followed before opening a restaurant such as health checks, food standard testing and if food complys with health standards. It is also critical that the best location possible is chosen. A restaurant can quickly go out of business if it is strategically placed in a bad area which is why it could be said that there are many barriers to entry in the fast food industry.
However!!
companies also use 'interdependence' to know what other firms are doing so that they can price their products accordingly
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