HE 11 : Location competition : Burger King and McDonalds -Karteikarten | Quizlet

Two levels of competition in the fastfood industry ?

- Franchisors compete globally for customer loyalty

- Franchisors compete on local markets to acquire new customers

What is the most important selling point in the fast food industry ?

Convenience, has to be fast, close to customers and easy access

Since the products tend to be the same this is a differentiation point

What are F1 and F2 in the hotelling model ?

Symmetric firms, they posses same attributes or conditions and marginal costs

Reality of McDonalds and Burger King ?

• McDonald's has a higher baseline utility than Burger King; and

• McDonald's marginal cost is lower than Burger King's.

They are asymmetric

Burger king price and profit with distance ?

• 0−2.5 miles: Burger King's price increases monotonically with distance;

• More than 2.5 miles: Burger King's price stops responding to distance;

• 0−3.5 miles: Burger King's profit increases monotonically with distance;

• More than 3.5 miles: Burger King's profit stops responding to distance, fixed at the monopoly profit.

What is the PRE ?

Price response elasticity : ratio of the percentage change in one firm's price to the percentage change in the other's price

How is the PRE for both firms ?

Not paralleled due to asymmetry of firms

• 0−2.5 miles: McDonald's PRE monotonically decreases with distance

• More than 2.5 miles: McDonald's PRE stops responding to distance

• 0−1 mile: Burger King's PRE increases monotonically with distance

• 1−3 miles: Burger King's PRE monotonically decreases with distance

• More than 3 miles: Burger King's PRE stops responding to distance

McDonalds and Burger King locations ?

- In small markets McDonald's has a strong propensity for the center, regardless of whether Burger King moves first or not and regardless of where Burger King is located; in large markets, McDonald's propensity for the center decreases, and intends to differentiate from Burger King.

- Burger King never takes the center even if it moves first and has the opportunity to do so. Burger King is always on the opposite side and moves toward the center, only if McDonald's moves away

What are the location patterns due to ?

Asymmetries of the two firms, McDo is dominant

> Location equilibrium where F1 and F2 are in the center does not exist

Why is it interesting for McDo to stay in the center in small markets ?

- Can drive BurgerKing out due to competitive pricing

- Increase the consumer surplus without changing the producer surplus