Running head: DIFFERENTIATING BETWEEN MARKET STRUCTURES

Differentiating Between Market Structures Jimmy Barker, April Lovelady, Andre Rado, Whitney Pennyman, Jamie Perez, and Shannon Williams-Rairden September 11, 2012 ECO 212 Lisa Giarda

DIFFERENTIATING BETWEEN MARKET STRUCTURES Differentiating Between Market Structures There are several major types of marketing structure public goods, private goods,

common resources, and major monopoly. A public good (or service) may be consumed without reducing the amount available for others, and cannot be withheld from those who do not pay for it (Public good, 2012, para. 2). Public goods are conceder as both non-rival and non-excludable and example of this would a traffic light it cannot be limited to how many people can look at it. Looking at private goods, they are conceder as excludable and rival. Private goods are clothes, haircuts, food, and numerous other commodities and services fall into this alliance. Excludability is when the seller can "exclude consumers of private goods, from consuming the product if they are not willing or able to pay for it" (Riley, 2006, para. 1). Rivalry is defined as "a private good, one person's consumption of a product reduces the amount left for others to consume and benefit from - because scarce resources are used up in producing and supplying the good or service (Riley, 2006, para. 2). Common resources can be conceder as lakes, forest, and rivers. If a good is rival but not excludable, it is a common resource. Forestland in many poor countries is a common resource. If one person cuts down a tree, no one else can use the tree (Hubbard, & O'Brien, 2013, p. 154). A major monopoly is a service offer, and there is not a compatible service offered. In one Chattanooga community, there are two electric companies, two water companies, and one cable company. Depending if a person lives in the city of Chattanooga or the county determines which electric company or water company a citizen can use. This is a called monopoly because there is no alternative. The same goes for the cable company; the community only has one

DIFFERENTIATING BETWEEN MARKET STRUCTURES option to choose from so they can charge the consumer whatever the company wants. The consumer must decide whether he or she is willing to pay for this service. Market equilibrium will be affected labor by its supply and demand. When companies

have to decide how many employees to hire, determining the correct amount with is a key factor for a company to maintain maximum profitability. Too much labor can cause a companys profits to drop because there is the possibility of creating a higher supply, which in turn causes the cost of the product to decrease, which can lead to the companies losing money. Hire too few and a company may not be able to maximize its profit. Companies will also need to watch for factors that can cause the demand curve to shift which will lead to a change in the market equilibrium. According to Hubbard and O'Brien (2013) five key factors that can cause the demand curve to shift. Increases in human capital will cause the curve to shift right. Simply put, the more intelligent the worker, the better the output from that individual. Changes in technology will cause the curve to shift right; the better the equipment the easier it will be to produce more products. Change in price will cause the curve to shift left or right, depending on the price change. Changes of inputs will cause the demand curve to shift right; more available tools or equipment will make the employee increase productivity. Finally, changes in the number of firms in the market will make the curve shift left or right. Which is whether a new firm enters the market or one leaves. Labor supply is determined by which companies are willing to pay a labor force, the more available labor there will be willing to work for your company. According to Hubbard and Smith there are three factors that can change the supply curve, which in turn will affect the market equilibrium. Increasing population will cause the labor

DIFFERENTIATING BETWEEN MARKET STRUCTURES curve to shift to the right, basically more workers competing for the same wage. Changing demographics can cause a shift to either the right or left and aging population can lead to a shift to the left if there is there are younger individuals to fill positions as the people retire. Finally changing alternatives can cause the labor supply curve to shift left; if laborers find other alternatives there may be less individuals to fill these positions. McDonald's can be identified as an oligopoly. An oligopoly market structure is between the two extremes of a perfect completion and a monopoly. Firms in an oligopoly are price makers; their control over prices is determined by the prices of their rivals. For example, before McDonald's decide on an advertising strategy management of the organization may take into

consideration how another fast food restaurant such as Burger King may react (Oligopoly, 2001). Another characteristic that makes McDonald's an oligopoly is the frequency of their price changes. In an oligopoly, firm prices tend to change less frequently than a perfect competition. When an oligopolistic firm changes their prices other firms within that market structure usually follow suit. In 2003, McDonald's launched their version of the Dollar menu (Kelso, 2010). This menu offered a variety of burgers, fries, and drinks for $1. McDonald's got on board with the dollar menu after Burger King and Wendy's successfully offered these same types of products for $1. Wendy's was the first fast food restaurant to offer this type food at such low prices. Wendy's chose to offer a value menu to remain competitive (Kelso, 2010). McDonald's along with many other firms within this market structure looked at what Wendy's could accomplish with their new prices. This forced other restaurants like McDonald's to lower their prices to remain competitive.

DIFFERENTIATING BETWEEN MARKET STRUCTURES Because interdependence exists between all businesses that are oligopolies, there is no one true structure or model of oligopoly. McDonald's is no exception as they have a range of prices they can charge. And they are not obligated to charge the same prices as their

competitors. They price their food options high enough to make a profit, but low enough so they do not lose customers. For example, McDonald's charges $2.99 for a Value Meal based on what Burger King and Wendy's are charging for a similar menu item. McDonald's would have to reconsider its pricing if its rivals were to change their prices.

In this oligopoly, pricing decisions mainly depend upon the various conditions (e.g. demand, cost, and pricing strategies of competitors) that are very effective for the McDonalds. This also helps in fixing accurate price for their products to attract and retain the likely customers as well as attain large market share and profit. The certain other important features of this market structure are a few sellers, detectable impact, both homogenous or product differentiation is possible, not easy for other industry to enter, interdependence, etc. All these above-mentioned features enable McDonald's in making its own effective decisions because of the interdependence and knowledge about competitors, so that it will be much easier for McDonald's, to cope with the critical issues and easily compete with rivals while earning maximum profits.

The United States operates more than 184,000 fast-food companies that annually produce around $165 billion in revenue, according to the 2011 market research. McDonald's is one of the largest fast-food industries in the world, but still suffers from economic downturn. Some of biggest factors that affect McDonald's supply and demand would be the meal prices, consumers

DIFFERENTIATING BETWEEN MARKET STRUCTURES desiring healthier foods, and not possessing better food variety. Although fast-food restaurants normally do better than pricier restaurants during economic recession because of the long-term downturn consumers are eating more at home to save money.

Big restaurant chains are responding to customers' needs by increasing advertisement and lowering their prices to attract consumers back to their restaurant. Smaller fast-food chains do not have the same budget, so they are not able to protect their profits. For some customers the price is not a concern, but the variety, and desire for healthier foods are. QSR magazine reported McDonald's 2011 sales outplaced the 2009 sales by $1.5 billion after the franchise included new menu items and fruit smoothies. Customers demanded healthier foods causing McDonald's and other fast-food restaurants to add vegetables and fruits to their menus. Low prices on vegetables, meats, and other commodities helped McDonald's not lose profit by cutting meal prices. However, trying to attract customers by cutting prices may backfire if cutbacks exceed production costs and food. The criteria to evaluate the effects of McDonald's supply and demand is based upon menu options, nutrition, and pricing to ensure customer satisfaction and dependability.

DIFFERENTIATING BETWEEN MARKET STRUCTURES References Hubbard, G., & O'Brien, P. (2013). Economics (Fourth ed.). Upper Saddle River, NJ: Pearson Education. Kelso, A. (2010, November 23). The evolution of the value menu. Retrieved from http://qsrweb.com/article/177960/the-evolution-of-the-value-menu Oligopoly. (2001). Encyclopedia of Business and Finance. Retrieved from http://www.enotes.com/oligopoly-reference/> Public good. (2012). Retrieved from http://www.businessdictionary.com/definition/publicgood.html#ixzz260NIocbx Riley, G. (2006, September). Public and Private Goods. Retrieved from http://tutor2u.net/economics/revision-notes/as-marketfailure-public-private-goods.html