Question

Read the article then answer the questions below.

Fast-food price fight: Combo deals center stage New 'bundled offers' target value-conscious consumers NEW YORK

Another price fight is breaking out among the country's biggest burger chains, this time with meal combos designed to make people forget about the once ubiquitous dollar menus. The new "bundled offers" show how hungry McDonald's, Burger King and Wendy's are to win over deal seekers, and how quickly a popular idea gets copied in the fast-food industry. The latest trend on the value front popped up in late 2015 after Wendy's rolled out a "4 for $4 deal," which includes a Jr. Bacon Cheeseburger, chicken nuggets, small fries, and a small drink. This week, Burger King followed with a similar "5 for $4" deal, and McDonald's introduced a "McPick 2 for $2" deal to kick off the new year. "People look at what other folks are doing, and if they think they're getting traction, they say we need to do a version of that," said Tony Pace, former chief marketing officer at Subway who now runs a marketing consulting firm. Though typically not big profit generators, promotional deals can steer people in the door who might not have stopped in otherwise. The additional food tacked onto those bundled orders helps drive up sales as well. That's what happened when Burger King tested its "5 for $4" deal in recent months, said Alex Macedo, who heads the chain's North America business. "We believe it's going to be very profitable for franchisees," Macedo said in a phone interview. The new deals come after fast- food chains struggled to raise prices on value menus without scaring off customers, even as commodity costs rise. McDonald's shifted from its hugely popular Dollar Menu to a "Dollar Menu and More" that featured a range of prices. Steve Easterbrook, who took over as CEO this past March, conceded the company's failure to come up with an adequate replacement for the Dollar Menu has hurt sales. For now, McDonald's said the "McPick 2 for $2" will run for five weeks, and that the details of the McPick offer will evolve over time. Burger King and Wendy's haven't said when their limited-time offers will end.

a. Name the market structure that typically has price wars.

b. Explain predatory pricing.

c. Why are firms with kinked demand curves less likely to change their prices?

Answer 1

a. Generally price wars are seen in an oligopoly market. Here two or more firms that have price domination , reduce the price of the goods in order to gain market share or create barriers to entry.

b. Predatory pricing operates in an oligopoly market , where few (two or more) firms compete over prices by reducing their individual prices. This is done in order to gain market share and attract new customers. Also, it creates barriers to entry of potential competitors in the market .

c. In an oligopoly market , firms have kinked demand curves . This suggests that the firms have dual demand in accordance to the price policy undertaken by the competitor firm. In oligopoly market , if one firm raises the price no other firm does so , hence , there is a substitution effect and as a result firm loses its market share. Here , demand curve is price elastic. In the other case , if one firm reduces its price , all other firms does so, hence , demand is price inelastic. Thus, in overall, an oligopolist firm has a kinked demand curve. The firm with the kink is less likely to change its price . Also , changes in variable costs does not cause changes in profit maximising price and output of the oligopolist firm.