Question

In India, increase in disposable income has increased the frequency of dining out. Big fast food chains like McDonald’s came to India in 1996, and soon other big outlets like Dominos, Pizza Hut, KFC, etc, followed suit, according to a study by AIIMS, Bangalore. According to another report, Indian fast food market is expected to grow at a compound annual growth rate (CAGR) of 18 per cent by 2020 due to changing consumer behaviour and demography.New brands are attracted to this market every day adding to the competition for existing players.Given this kind of competition, Mc Donald’s has tried hard to compete with the rest of the fast food chains. Frequent remodeling of the restaurants to create an exciting ambience and child friendly promotions have attracted customers. Burger King and Wendy’s have had to continuously struggle to keep up. Mc Donald’s tries to keep its customers loyal not only through affordable pricing but also through effective non price competition. Innovations like happy meals, frequently changing menus, party areas, drive-in outlets , flat screen TV availability has led to a constant flow of customers of all age groups. McDonald’s has not only been trying to beat other top competitors in the burger industry. It is now competing with even the non fast food chains like Chipotle, LPP etc. Even with Starbucks coffee, Mc Donald's competes with their Mc Cafes especially internationally. Competitors of Mc Donald's often complain against the blatant visibility their products get through high amounts of advertising – bus stops, Malls and even at traffic signals. Economists argue that such kind of high advertising increases costs for the firm but can be justified as they attract more customers and increase profit and also provide a wide variety to choose from. But despite such numbers there is a underlying truth that the price of the burger exceeds the additional cost of producing suggesting that allocative efficiency is missing in the market.(15marks)

a. On the basis of the above information identify which market structure does fast food industry belong to and justify your answer.

b. Why does product differentiation play such an important role in this market and how do high selling costs impact the average cost curve of the firm.

c. "This market suffers from productive and allocative inefficiency". Explain.

ANSWER ASAP

Answer 1

1) The market structure discussed in the case study relating to fast food industry in India is of Monopolistic competition. Under this type of market structure, there exists many firms in the industry selling differentiated products and there is free entry and exit of firms. It also promotes high competition thus involves high selling and advertising cost in order to attract consumers. As mentioned in the case study that companies like Mc Donald's is trying to beat its top competitors, increasing expenditure in order to be visible to customers, Burger King and Wendy's are struggling, are prominent examples stating that there remains high competition in the market. Also they are selling products which are similar ,hence showing few chatacteristics of monopolistic competition.

2) Product differentiation means differntiating a product of a company with that of another product of another company which are quite similar to each other. Companies in fast food store sell similar fast food products of their brands which differ from one company to another. Example - burger from Burger King and burger from Mc Donald's. So in order to make customers attract to the product of Burger King and not choose another similar product from Mc Donald's  product differentiation plays a important role. Under this companies advertise their products to bring visibility in the minds of people relating to their products.

High selling cost increases total cost of the company hence average cost of per product increases. In order to advertise their products they incur selling cost , which in turn increases total cost of the company.

3) As per the given case study, allocative inefficiency and productive inefficiency occurs. Productive inefficiency occurs when average cost of producing is high, which resukts to high cost of production. Allocative inefficiency happens when customers are not paying the efficient price which covers up the cost of production of the product. In amonopolistic market, due to capturing the market and high selling cost, total cost rises but selling price is also reduced by marketer in order to increase sales, thus resulting to inefficient pricing. Thus in the case study it is seen that in order to bring visibility in the minds of people relating the products of a company, they highly need to invest inorder to attract customers , also allowing lower selling price to them, which in turn brings ineffiency in both production and allocation.