10/13/2010Table of Contents
The Market for Fast Food in Canada3
Is the Demand for Fast Food Elastic or Inelastic?5
Influences on Price Elasticity of Demand7
The Relationship between Price Cuts and Total Revenue9
Understanding Fast Food Price Cuts12
The Market for Fast Food in Canada
When examining market structure, one must look at several factors including the quantity of firms, type of products offered, barriers to entry, pricing power and non-price competition. In order to define the fast food market, all of these factors must be considered. Due to competition, price wars, and barriers to entry in the fast food market, market structure becomes slightly muddled and difficult to determine. That being said, the fast food market may not solely be defined by one market structure. It is the combination of two separate market structures, which form the backbone of the fast food industry. These two structures are monopolistic competition and oligopoly. In the fast food market, the number of producers may be numerous; however, the number of firms may not always be the key point to consider when determining market structure. Instead, it is important to analyze whether there are a few firms that are relatively large and have substantial market share compared to the various others in the industry. In the case of fast food, one could say that there are thousands of fast food chains and restaurants scattered all over Canada and North America as a whole. Despite the large numbers, there are only a select few who dominate the market and produce a majority of the industry’s total output. (AmosWEB). The three prevailing ‘fast food giants’, according to their 2009 annual reports, were McDonald’s, Yum!Brands (Taco Bell, Kentucky Fried Chicken, Pizza Hut), and Wendy’s International. (Wikinvest). Though there are many competitors in the fast food industry, these three companies joined with a few others have a clear lead in market share of this market. The fact that there are only a few firms who have such a large impact within the fast food industry suggests that the market structure falls into the category of an oligopolistic market. Nonetheless, there are still other factors to examine. The next structure-determining factor is type of product offered. It is important to distinguish between standardized and differentiated products. Products in an oligopoly tend to be differentiated when the good is sold for personal consumption. The reason for this is that individuals enjoy variety, and this variation of products ensures the satisfaction of people’s wants and needs (AmosWEB). This slight differentiation of goods is evident within the fast food industry. Due to the similar products sold at fast food restaurants, companies must give the consumer a reason to choose their product and not that of the competitors. There are physical differences, perceived differences, and support services. Two burger joints may offer the same hamburger, but one may add a subtle twist to give the company an edge (AmosWEB). McDonald’s recently released their “Zesty Mango McMini”, which is simply a crispy chicken sandwich with a new sauce. This variation in their product is seen as a physical difference. Many other companies have followed suit and have created their own variations of certain classics (Food Beast). Perceived differences are generated through advertisements. Though two products may be close to identical, advertising and brand names set them apart. McDonald’s golden arches and familiar slogan, “I’m lovin’ it”, help set it apart in the fast food market by providing a familiar and trusted brand to consumers. Support services seen in the fast food world include the availability of drive-through restaurants or twenty-four hour service. Analysis reveals that products in the fast food market are slightly differentiated through multiple means. This shows once again that...