Extended Essay Rough Draft (Information)

Introduction

 The fast-food market in Canada has been on the rise over the last couple of years. Franchise’s have learned to trust their customer’s and have promised to expand in areas all over Canada. The same applies to Richmond Hill, where centres such as plazas and shopping malls have opened the flood gates for new franchises to develop. The target market of this research question is focused on a teenage demographic. For ages 0 to 14, there has been a decrease in the population of about 1,000 people from 2011 to 2016. For ages 15 to 19, there has been an increase in the population of about 4,000 people from 2011 to 2016. Majority of the data will come from the 15 to 19 age group. There is an increase in demand for fast-food in the teenage demographic, as it is a convenient and affordable way of eating. The dozens of fast-food restaurants in Richmond Hill, have made it is interesting to investigate how these franchise’s keep up with the increasing demand. Some of the product sold at these joints come from one producer. For example, the chicken sandwiches at Wendy’s, Burger King, and McDonald’s are produced by Keystone Foods. However, some products of each franchise are produced from a different vendor, classifying the product as a homogenous good, since the quality and taste of each product is relatively the same at each fast-food joint. The question becomes how smaller franchises compete with larger ones, and how they distinguish themselves from each other. While personal preference plays a key role for which restaurant to choose, factors such as theory of the firm and different market structures ultimately answer the question, “Which market structure most accurately characterizes the fast food market in Richmond hill Ontario, amongst a teenage demographic?”

Personal Engagement

 Thinking of an extended essay was a difficult process. The idea of picking a topic which is relevant in today’s world and is something that interests the writer is a hard combination to accomplish. This topic started to become discussed when I was travelling with my family to Knoxville, Tennessee in December break of 2017. On the car ride there, when our family stopped at a fast-food joint, my father was explaining to me how teenagers have different preferences than adults or seniors. For example, when my father was a teenager, he would indulge in fast-food more often than he does currently. Regarding taste preferences, he said that they have also dramatically changed over the years of his life. This thought stayed with me throughout the year, and my interest in it continued when our class studied market structures in economics. I was really interested this microeconomics topic, and when the time came to pick a focus for the extended essay topic, I decided to combine both ideas which interest me.

Hypothesis

 It can be hypothesized that the fast-food market in Richmond Hill, amongst a teenage demographic, is an oligopoly. A main reason for this hypothesis would be market dominance. Although there are dozens of fast-food restaurants in Richmond Hill, chains such as California Sandwiches and Big Boy Burgers may not be as popular within a teenage demographic. This is because they own a small percentage of the market share, while firms such as McDonald’s and KFC are dominating it. The big-name companies are often known as the price leaders, due to their influence in the market. Another reason for hinting that this is an oligopolistic market structure are the high barriers of entry. One barrier could be customer loyalty. Thousands of teenagers are loyal to restaurants such as McDonald’s or KFC, making it incredibly hard for smaller franchises to compete. The start-up cost is also expensive, due to different products being sold. Factors such as good location, training, and cooperating with government regulations also add to the cost.

Method of Collecting Data

 To conduct analysis on this research question, primary and secondary resources were used. Secondary sources such as Google Maps helped the investigation through finding locations of the restaurants in Richmond Hill.              Primary sources such as conducting surveys will be done, displaying information such as where teenagers buy their fast-food and if they are aware of different pricing strategies. The survey was completed by 236 people, through online means. Students from Richmond Green Secondary School, Richmond Hill High, and Bayview Secondary took part of the survey. Regarding individuals that are 13 years of age, the survey used students from Richmond Hill Montessori and Elementary Private School. This is an appropriate means of retrieving information, as it relates to the demographic of this research question. Interviewing 3 fast-food franchise owners were also completed to see the role of price and non-price competition, and the cost and revenue related information on this industry.  The tracking of prices of certain items on the menu of the fast-food chains were also done to see which companies are listed as the price leaders (tracked over a 4-week span).

Secondary Data

Market Structures:

To classify the structure of the fast-food market, it is important to investigate the different types of market structures.

1)     Perfect Competition- multiple small firms compete against each other, in which none have significant market power. No firm is labelled as a price leader.

This market structure depends on assumptions such as: all firms sell homogenous goods, no barriers to entry (no cost on entry and exit to the market), firms maximize their profit (Marginal Revenue = Marginal Cost), customers have no preferences

2)     Monopolistic Competition- multiple small firms compete against each other, however certain firms may have more significant market power than others. This is because the goods of each firm are not homogenous and have small differences.

This market structure depends on assumptions such as: each firm sells a slightly different product, no barriers to entry, firms maximize their profit, customers may prefer one product due to the slight difference

3)     Oligopoly- a select few number of firms dominate the market. These firms are labelled as price leaders.

This market structure depends on assumptions such as: firms could sell homogenous or slightly different products, contain barriers to enter and exit the market, firms maximize their profit, the oligopolies (firms which dominate market) set prices

4)     Monopoly- one firms dominates the entire market.

This market structure depends on assumptions such as: the monopolist sets the price and maximizes profit, contains high barriers to enter and exit the market

Fast-Food Chains:

There will be an investigation of 3 products from the following firms:

1)     Wendy’s

2)     McDonald’s

3)     Burger King

4)     KFC

5)     Dairy Queen

Products Investigated:

Within each firm, there will be 3 products which are investigated thoroughly. The products are Ranch Chicken Wrap, Chicken Sandwich, and Garden Salad. When consumers think about fast-food, some believe all restaurants sell relatively the exact same product. This theory can be somewhat proven correct as major firms dominating the fast-food market all buy from the same vendor and retailer. This would make consumers to believe that the products are homogenous and perfect competition is taking place. This theory is however wrong, as companies such as Dairy Queen suggest that products are sold through imperfect competition. Dairy Queen often sells their wraps with extra cheese and more ranch sauce, according their website. This may appeal to the teenage demographic, urging them to buy from that specific chain. While this may not be a big enough incentive for more consumers to buy at Dairy Queen, it still suggests that there are most likely minor differences between each product at each firm. Bigger name fast-food chains such as McDonald’s and KFC sell a wider variety of product than firms such as Dairy Queen. Due to them having a larger percentage of the market share, this supports the claim of the fast-food market being labelled as an oligopoly.

Primary Data

Abnormal Profit:

 It is a common misconception that the fast-food market can be characterized as a perfect competition. The reason for this, is because of the firms that are in competition with each other set the prices for their products and the firms sell “homogenous” products. This reasoning is flawed due to multiple reasons.

 The theory of Economies of Scale states that when there is an increased output in product being sold, the price to produce the product per unit decreases. This theory applies to the fast-food market, because fast-food chains such as McDonald’s have a larger market share compared to Dairy Queen, explaining why it has a wider range of product. The cost of production for McDonald’s will decrease, meaning abnormal profit will be made. This defies perfect competition, as only normal profit can be made within that market structure.

 Abnormal profit is calculated through total revenue (TR) minus the total costs (TC). It is also known as ‘supernormal profit’, because it is additional profit above the level of normal profit. This type of profit exists in perfect competition and monopolies, which conclusively proves that the fast-food market amongst a teenage demographic is neither of the two.

Survey:

A copy of the survey used to obtain results:

Hi everyone! My name is Sachin Sayal, and I currently attend Bayview Secondary School in the International Baccalaureate program. The Extended Essay is a mandatory assignment needed for my IB diploma. My extended essay focuses on economics, more specifically market structures in our community. If you could please answer a couple of questions to help obtain my raw data, that would be greatly appreciated.

1)     If you do go out for fast-food, which place do you go to most?

*To prevent the survey from becoming void, please answer to the best of your ability and truthfully*

Dairy Queen ___    Burger King ___    McDonald’s ___    Wendy’s ___    KFC ___

2)     Before you purchase your food, how many joints do you visit?

*To prevent the survey from becoming void, please answer to the best of your ability and truthfully*

1___     2___     3___     4___    Other_____

3)     Are you aware of any combo or discount at your favourite fast-food joint?

*To prevent the survey from becoming void, please answer to the best of your ability and truthfully*

Yes ___    No ___   

Results

1)     If you do go out for fast-food, which place do you go to most?

Fast-Food Joint

Results

Dairy Queen

8

Burger King

24

McDonald’s

122

Wendy’s

52

KFC

30

2)     Before you purchase your food, how many joints do you visit?

Number of Times

Results

1

207

2

16

3

11

4

2

Other

0

3)     Are you aware of any combo or discount at your favourite fast-food joint?

Answer

Results

Yes

43

No

193

Market Share:

 After the survey was conducted, the results for the fast-food restaurant with the biggest market-share within a teenage demographic were tabulated:

Fast-Food Chain

Percentage of Market Share

Dairy Queen

3.4

Burger King

10.2

McDonald’s

51.7

Wendy’s

22.0

KFC

12.7

Graph of tabulated data:

Calculation of Concentration Ratios:

 A concentration ratio indicates the size of firms and acts a representation of their dominance in the industry. For example, a low concentration ratio indicates a competition within the firms in a specific industry while a concentration ratio of 100% indicates a monopolistic market structure.

If one firm has at least 80% of market share- Monopoly

If two out of five firms have at least 80% of market share- Duopoly

If three out of five firms have at least 80% of market share- Oligopoly

Calculations:

McDonald’s market share- 51.7% (not a monopoly)

McDonald’s market share + Wendy’s market share (51.7 + 22)- 73.7% (not a duopoly)

McDonald’s market share + Wendy’s market share + KFC market share (51.7 + 22 + 10.2)- 83.9% (oligopoly)

 The results display that there is an oligopoly present. The concentration ratios of the top three firms had to display a total percentage of market share of at least 80%. In this case, the top three out of five firms had 83.9% of the market share. After interviewing the franchise owners of the specific locations, no one had answers to the fact about certain dominance over other firms, other than the fact that product quality might be a factor.

Price Tracking:

 The investigation of three products which are sold throughout all five fast-food chains was conducted. The food items were: Ranch Chicken Wrap, Chicken Sandwich, and Garden Salad. The cost of these products was closely monitored for 50 days throughout the summer to see if any change in price did occur. This will allow for an investigation on whether firms are price takers or price setters.

 Sources