Question

Question 1 The following excerpt provide a description of the strategy used by fast food chains in the U.S. to raise its sales A war is breaking out between McDonald's, Burger King, and Wendy'sand that's great news for consumers America's biggest fast-food chains are engaging in a new price war Wendy's just started offering a "4 for $4" meal that includes a junior bacon cheeseburger, four chicken nuggets, small fries, and a drink, all priced at $4. The Wendy's deal follows a similar meal discount from McDonald's this summer, in which the chain was offering a double cheeseburger and small fries combo for $2.50 Now McDonald's is planning to go even further to reestablish itself as the low-price leader in fast food, according to an internal email to franchisees. Burger King is also lowering prices. The chain has been offering a 10-piece chicken nugget deal for $1.49, as well as coupons for other items through its mobile app Meanwhile KFC has been offering a $5 "Fill Up" meal that includes an entree, a drink, several sides, and a dessert all for $5. The meal is largely responsible for recent sales growth at KFC, according to Citi Research analysts. Excessive discounts are hurting the companies' profits, however, so all four chains are pricing promotions a little higher than in the past. Instead of discounting individual items down to around $1 to attract customers, the chains are grouping menu items together and offering a single discount for the whole meal, so tickets are closer to $4 or $5 McDonald's started this transformation two years ago when it axed its "Dollar Menu" and replaced it with the "Dollar Menu & More," which included items that cost more than $1. Wendy's made a similar move around the same time, turning its "99-cent Value Menu" into a "Right Price Right Size" menu with items that cost more than $0.99 The new discount menus have failed to wow customers, however, which is why the chains are now renewing their focus on promotions, Nation's Restaurant News reports No matter what happens with the new price war between the nation's fast-food giants, it will definitely end up being a win for consumers a) What market structure do the above fast food chains fit in? Explain your answer by discussing three (3) market characteristics that best describes the fast food industry (9 marks) b) Explain how the discussion of McDonald's strategy and the reaction of its rivals relates to the kinked demand curve model. Draw the kinked demand curve in your explanation (8 marks) c) Explain the concept of economies of scale. In regards to the fast food industry (8 marks) give three (3) reasons how economies of scale may be achieved

Answer 1

Solution A

The above market perfectly fits in with Oligopolistic market structure because market is dominated by 4 players with equal footprint and spending powers. All have been simultaneously indulging in price wars which suggests healthy balance sheets and hence neither firm can establish monopoly and also disallows any otger firm to enter market because of price wars.

Solution B

The above chain reaction by all players to offer product at bundled pricing and maximum value and ready to match rivals if prices fall however unlikely to match if prices are raised.

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Solution C

Economies of scale is achieved when scalability is huge and costs get evenly optimised and which means that increasing productivity saves the cost.

In retail industry it is achieved by following ways:

• Expanding retail outlets
• Sourcing raw materials from one supplier in bulk
• Optimising manpower for higher delivery orders and using batch delivery to save costs