Good And Service Produces In The Market

Published Date: 02 Nov 2017

Course Details

Subject Code : UBEA2113

Subject Title : Microeconomics I

Tutorial Class : T1

Tutor’s Name : Lee Chin Yu

Assignment Details

Company Name : McDonald’s

Due Date : Week 10 - Friday, 22 March 2013 (before 5:00 pm)

Important Note : Submission of assignments is the responsibility of the students.

Student’s Details

1. Student ID and name : Goh Pei Shan 1107453

2. Student ID and name : Lau Tze Yen 1107143

3. Student ID and name : Low Bo Lin 1106539

4. Student ID and name : Low Shu Wei 1106697

Assignment Overall Marks : _______________ Marks.

Appendix II

(Marking Scheme)

UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF BUSINESS & FINANCE

Bachelor of Economics (Hons) Financial Economics

(Academic Year 2012/2013)

Marking Scheme for Group Assignment

Subject Code and Subject Title: UBEA2113 Microeconomics I

No.

Guideline Criteria

Marks allocation

Marks awarded

1.

Introduction:

Background of the firm

What types of good and service produces in the market?

20

2.

Content:

What pricing strategies can a firm use to maximize profits?

Why that is the best pricing strategy?

70

3.

Conclusion

10

Total

100

Comments: ______________________________________________________________

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Signature of Marker : ­­­­­­­­­­­­­_______________________

Marker’s name : Lee Chin Yu ____________

Date : ­­­­­­­­­­­­_______________________

Introduction

McDonald’s is one of the world’s leading food service organizations. They own one of the world’s most recognized and respected brands. They have an unprecedented global infrastructure and competitiveness in restaurant operations, marketing, retailing and franchising. In 1940, burger brand started in long journey, when Dick and Mac McDonald’s opened the first McDonald’s restaurant in San Bernardino, California. A typical drive-in featuring a large menu and car hop service. Firstly, they have a hotdog standpoint, but after build up the restaurant they served about 25 items, which were mostly barbequed. McDonald’s became a popular and lucrative youth gathering place. The restaurant shut down for alterations for three month in 1948 by them but it reopens as a self-service drive-in restaurant in December.

The major revenue came from hamburgers, which were sold at a nominal price of 15 cents. In 1949 where the potato chips was replaced by French fries and triple thick milkshakes also make their debut. In 1953, the McDonald’s brothers started franchising their restaurant and restaurant slowly became famous. The first franchise was taken by Neil Fox and under it. The second McDonald’s restaurant was opened in Fresno, California. It was the first to introduce the Golden Arch design. The third and fourth McDonald’s restaurants were opened in Saginaw, Michigan and Downey, California.

In 1955, Kroc’s first McDonald’s restaurant opened at the same year that Kroc incorporated his company as McDonald’s Corporation and this happened is due to the incident in 954 where Ray Kroc, a seller of Multimixer milkshake machines, learned that brothers Richard and Maurice (Dick and Mac) McDonald were using eight of his high-tech Multimixers in their San Bernardino, California restaurant so he went to take a look at the restaurant. He keeps defining the cleanliness, quality and service that continue until nowadays.

In 1956, the McDonald’s brother had licensed the franchise right for Cook Country, lllinois to the Frejlack Ice Cream Company. From 1958 until 1983, there are a lot of improvement and many solution was being introduced to many people even to the world when McDonald‘s goes international in 1967. Unfortunately, Ray Kroc passed away in 1984 but this incident did not stop McDonald’s to keep improving in the world. In 1988, the first restaurant opened in Belgrade, Yugoslavia, followed by the first Soviet restaurant in Moscow (1990).

From 1990 to 1992, there have several McDonald’s opened over the world and breaking records of opening day sales. In 1992, the largest McDonald’s was opened in Beijing, China, having more than 700 seats. In 1993, the first sea-going restaurant was build up, aboard the Finnish Cruise-ferry Silja Europe, sailing between Helsinki and Stockholm. In 1994, McDonald’s bagged the Catalyst Award for its program for ‘fostering leadership development in women’. In 1996, the first Indian restaurant was opened. McDonald’s also keep coming out new and creative advertisement and even a slogan to attract more customers since the first television commercial in year 1996.

In 2003, the company launched the ‘I’m lovin’ it’ campaign. In 2005, McDonald’s began its McDelivery service in Singapore. In 2006, the chain announced that the company will announce all of its products in the nutritional information on its packaging, for the benefit of customers. From year to year, McDonald’s now keep launching some new product or menu to keep attract more customers. The years before has showed a huge successful of McDonald’s and also their changes from nameless to famous in all over the world.

Pricing Strategies That Firm To Maximize Their Profit

1) Mixed Bundling

Mixed bundling is a type of bundling. According to business dictionary in marketing point of view, bundling is a technique of offering two or more complementary goods or service together as a package deal and sold at a price attractively lower than the total of their individual selling price. However, according to Ivan Arribas and Amparo Urbano (2004) mixed bundling refers to the "practice of offering consumer the option of buying goods separately or else package of them".

McDonald’s was a world well-known hamburger fast food restaurant. McDonald’s also offering counter service and drive-through service in many countries. As a well-known hamburger fast food restaurant, McDonald had using mixed bundling to maximize their profits. Usually when a customer orders a hamburger, the cashier will ask him or her want the hamburger with set or without set. For example, McDonald offers a la carte of McChicken cost RM 6.65, a small Coca-Cola drink cost RM 2.60, a medium of French fries cost RM 2.95, and a medium set of McChicken with carbonated drink and french fries cost RM 10.95. Mixed bundling allows consumer to choose which to buy, either buy McChicken, Coca-Cola drink and French fries individually or a set of McChicken.

Let me make an example, purchase hamburger, carbonated drink, and French fries separately at the price of RM7 for hamburger, RM 2.50 for carbonated drink, and RM 3.00 for french fries or purchase a set of hamburger with carbonated drink and french fries at the price of RM 12.

Willing to pay (RM)

Hamburger

Carbonated drink

French fries

Customer A

7.00

1.80

2.20

Customer B

5.50

2.50

2.00

Customer C

4.00

2.00

3.00

Customer D

6.80

2.40

2.80

In order to sell hamburger to all the four customers, McDonald must charges the prices no greater than RM 4, because it is the lowest willingness to pay of customer C compare with willingness to pay for another 3 customer. The same is true for carbonated drink and French fries which cannot charges the price greater than RM 1.80 for carbonated drink and RM 2 for French fries. In the other hands, carbonated drinks and French fries have a constant marginal cost RM 1.50 per unit and marginal cost of hamburger per unit is RM 3.

At these prices, the McDonald’s producer surplus for carbonated drink will be

Producer surplus for carbonated drink = (price – marginal cost) ×quantity

= (RM 1.80 – RM 1.50) ×4

= RM 1.20

McDonald’s producer surplus of french fries will be

Producer surplus for french fries = (price – marginal cost) ×quantity

= (RM 2 – RM 1.50) × 4

= RM 2

and McDonald’s produced surplus of hamburger will be

Producer surplus for hamburger = (price – marginal cost) × quantity

= (RM 4 – RM 3) ×4

= RM 4

Total McDonald’s producer surplus will be RM 7.20 (RM 1.20 + RM 2 + RM 4) if the McDonald sells the hamburger, carbonated drink, and french fries separately.

If using the price of bundle, McDonald need to find out each customer’s willing to pay for a set of hamburger.

Willing to pay (RM)

Hamburger

Carbonated drink

French fries

A set of hamburger

Customer A

7.00

1.80

2.20

11.00

Customer B

5.50

2.50

2.00

10.00

Customer C

4.00

2.00

3.00

9.00

Customer D

6.80

2.40

2.80

12.00

From the table above, we can determine the maximum price that McDonald can charge for a set of hamburger to all four customers was RM 9. The firm’s producer surplus will be

Producer surplus for a set of hamburger = (price – marginal cost) × quantity

= (RM 9 – RM 6) × 4

= RM 12

However, by using the mixed bundling McDonald will able earn more profit when customers having an offer a choice to choose a set of hamburger or order it separately. We can calculate it by comparing each customer’s willingness to pay to the cost of order hamburger, carbonated drink, and french fries separately and the price of a set of hamburger.

Customer A will only buy hamburger. His willingness to buy for the carbonated drink and french fries separately is below the price of RM 2.50 for carbonated drink and RM 3.00 for french fries. At the same reason, he will not be willing to buy a set of hamburger. Therefore, McDonald only sells hamburger to Customer A.

Customer B will only purchases carbonated drink. His willingness to purchase for the hamburger and french fries separately is below the price of RM 7.00 for hamburger and RM 3.00 for french fries. The same is true for the set of hamburger, which he willing to purchase only at value of RM10.00. Thus, McDonald only sells carbonated drink to Customer B.

Customer C will only buy french fries. His willingness to pay for hamburger is only RM 4.00. It is far below the price of RM 7.00. Furthermore, Customer C is willing to pay at most RM 2.00 for carbonated drink and RM 9.00 for a set of hamburger. In the view of this, McDonald only sells french fries to Customer C.

Customer D will not be willing to purchase hamburger, french fries, and carbonated drink separately because his willingness to purchase for each item is below than the price. But Customer C will be willing to purchase a set of hamburger. It is due to the willingness to pay for a set of hamburger is equal to the price. According to this situation, McDonald will sell a set of hamburger to Customer D.

The total producer surplus of McDonald will be

Producer surplus for hamburger = (price – marginal cost) × quantity

= (RM 7- RM 3) × 1

= RM 4

Producer surplus for the carbonated drink = (price – marginal cost) × quantity

= (RM 2.50 – RM 1.50) × 1

= RM 1

Producer surplus for french fries = (price – marginal cost) × quantity

= (RM 3.50 – RM 1.50) × 1

= RM 2

Producer surplus for a set of hamburger = (price – marginal cost) × quantity = (RM 12 – RM 6) × 1 = RM 6

The total producer surplus when McDonald giving an offer a choice to choose a set of hamburger or order it separately is RM 4+ RM 1+ RM 2 + RM 6 = RM13.

In conclusion, mixed bundling pricing strategy can maximize McDonald’s profits which let customer choose buys it separately or as a set of meal.

2) Odd- even pricing

Odd-even pricing is a pricing strategy that under psychological pricing strategy. According to the aspect from marketing point of view, psychological pricing strategy will influenced the customer’s emotion reaction on purchasing items according to the prices. Thus, as one of the basic types of psychological pricing strategy, odd pricing is referring to the practice of expressing a price so that it ending just below the nearest round number (Robert M. Schindler and Lori S. Warren 1988). For example retailers will set up a price for its products to RM8.95 or RM12.60 rather than the even price like RM9.00 or RM13.00.

McDonald as a well-known fast food restaurant also had using other strategy to maximize their profits besides of mixed bundling which were one of the basic types under psychological pricing strategy, odd pricing. In fact, McDonald had been using this strategy for such a long time from the past till now because according to the customer behavior on reading the menu as a result most of the customers will first have a look at the prices of the product then only will start to choose what they want. This behavior had gave a inspiration to McDonald by pricing the products just below the nearest round number to attract customers because most of the customers will not put attention on the truth that the price actually can be round off to a significant number. It is due to the believed that this illusion of much cheaper products triggers an enhanced buyer response (Judith, Philip & Ron, 1997).

According to the price of product that McDonald set up, we can noticed that McDonald had launching a set of value packages for customers to choose of course customers also can choose individually products. However, what we can see is the price of the products especially for the value packages all of them are priced just below the nearest round number like RM12.45 instead of RM12 or RM6.60 instead of RM7. This actually can attract most of the customers that do not care about the significant number behind or those have low purchasing power like student because they are not consider in the labor force and the pocket money that their parents gave are lesser compare to those who are working. Other than that, this also can attract those who are earning low salary just like the diagram provided below.

Price (RM)

Po

P1

A

B

DD

C

Quantity

Q0

Q1

According to the diagram above, at set of McDonald’s McValue packages like Mc Chicken package is about RM10.45 for medium sizes after using odd pricing strategy which means that before using odd pricing on the product the price can be more than RM 10.45 become RM11 or more. Thus, before using odd pricing strategy the price of the product was at Po and the quantity of product was Qo. The area of revenue of McDonald is area A and area B. However, after using the odd pricing strategy customers willing to purchase more because of the price are lower compare to the past prices. These phenomena had showed in the diagram 1 where the price was moving from Po to P1 and quantity was moving from Qo to Q1. From the diagram above, McDonald’s revenue had change to area B and area C. After the using the odd-even pricing, the area of McDonald’s revenue had become bigger.

In addition, McDonald can maximize the profit from this because when McDonald still set the price of the product at a whole number like at RM11 for a set of Mc Chicken packages will gave customers an illusion like this product was quite expensive compare to others but after McDonald changed the price lower a bit to RM10.45 customers might think that McDonald is having a promotion or the product is in accordance with the price that they willing to pay or the price that they affordable so they will purchase more compare to the past. This also can attract more new customers to purchase. In spite of that, customer are more willing to buy is because of the value packages, seasonal products like prosperity burger during the Chinese New Year period and also the promotion hours like from 12pm to 3pm and 6pm to 9pm.

In conclusion, McDonald can maximize profit because when there are more customers willing to buy the products McDonald can even earn more and by using odd-even pricing strategy to attract more customers in the end can lead to maximize profits.

3) Price Discrimination- third degree of price discrimination

A firm with market power can influence the price in the market and capture surplus. One way a firm may capture surplus is through price discrimination – that is, by charging different buyers different prices for the same good, even though there is no difference in costs between customers. There are 3 basic types of price discrimination: first-degree price discrimination, second-degree price discrimination and third-degree price discrimination.

With first-degree price discrimination, each customer is charged the maximum price he would be willing to pay them. This price is called the reservation price. Under second-degree price discrimination, it leaves the consumer with some consumer surplus. Thus relative to the first degree price discrimination, the total profit under the second degree is lower. This discrimination practice is based on giving discount for buying extra quantities of the good. With third-degree price discrimination, are two identifiably different groups of customer are charged different price.

McDonald is one of the world’s largest foodservice retailers. There were more than 30000 McDonald’s in 121 places and countries all over the world including Canada, the Caribbean, Europe, Central and South America, Australia, Japan, Korea, Southeast Asia, even Russia and China.

As people in different countries have different distribution of income, McDonald is impossible to keep the same price in each country. Thus McDonald launched a variety of low-cost menu’s in different countries in order to reach out the common people in those countries. The price of McDonald is not same in every country. So that it had using third degree price discrimination to maximize their profits and making company the company more popular among the local people. For example, McDonald in Switzerland in 2008 was around CHF 6.50. After convert to US dollar, McDonald in Switzerland was USD 6.36 (diagram 2). However, McDonald in US was USD 2.99. From the statement above, McDonald’s can earn USD 3.37 (USD 6.36 - USD 2.99) from the third degree price discrimination.

Besides that, McDonald’s is giving up coupons to public. Coupons give a way of the third degree price discrimination. Generally, students are quite sensitive to price of goods. When the price of McDonalds’s drop a bit lower, the consumer desires will increase greatly. Furthermore, they will use it immediately if the coupon whose contents match with them. This discount would motivate public to buy more unit of McDonald’s set than their plan. McDonald can screen out different willingness from customer. Those consumer use coupons to buy McDonald’s set will consider as price elasticity of demand for larger consumer group. However, those consumers without coupon to buy McDonald’s set will take into account of small price elasticity. By using third degree discrimination, McDonald can charge a higher price to those consumers with price inelasticity and receive low cost for those consumers with price elasticity. Thus, McDonald can maximize their profit.

Conclusion

Fast food market is an oligopoly. It is dominated by a small number of sellers which were McDonald, Burger King and KFC. Before they do any strategy planning, they need to take into account of other seller’s responses and aware of the other seller’s action. The decision that they made will affect other sellers. For example, if McDonald introduces new promotion, KFC or Burger King may also introduce new recipe or product in order to attract back their customer.

How McDonald can maximize their gain by formulate pricing strategies? Which pricing strategies are the best? We had exposure some pricing strategies that imply by McDonald. Mixed bundling was the best pricing strategy compare with odd pricing and third degree of discrimination. Mixed bundling was the most famous pricing strategy that frequently use in fast food industry. Difference people have different preference. We are unable to fulfill all the preference that consumers require. By using mixed bundle, McDonald can try to fulfill preference of consumers by offering consumer the option of buying goods separately or set meals. Thus, it may able to eat more consumers’ surplus.

McDonald was world’s largest foodservice retailers. According to McDonald’s cooperation website, McDonald’s has more than 33,000 restaurants around the world in 118 countries. Based on different income per capita and eat habit, implementing third degree price discrimination was more efficiency. Same product should sell at same level of price in difference countries after convert to single currency. However, it was impossible to implement. It was due to CPI of each country. McDonald’s cannot change the same price in different countries. From the diagram 2, McDonald’s facing losses when some countries convert back to USD. Compare with mixed bundling, third degree price discrimination only can eat some part of consumers’ surplus.

Furthermore, odd pricing was given no impact to consumer if the consumers are price inelasticity. Therefore, McDonald’s will loses some profit. Value packages during promotion hours like from 12pm to 3pm and 6pm to 9pm and seasonal products like prosperity burger during the Chinese New Year period were a good pricing strategy that implementing by McDonald’s. It would attract consumer come and dine in McDonald’s.

In fact, pricing strategies that impose by McDonald’s such as mixed bundling pricing strategy, third degree pricing discrimination and odd pricing can help McDonald’s to maximize their profit.

Reference

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Judith. H, Philip. G and Ron. G (1997), The widespread use of odd pricing in the retail sector. Marketing Bulletin, 1997, 8, 53-58, Research note 1. Retrieved from March 11, 2013, http://marketing-bulletin.massey.ac.nz/V8/MB_V8_N1_Holdershaw.pdf

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Perloff, J.M (2012). Mircoeconomics (6th edition). In Perloff, J. M. Pricing And Advertising (pp. 416-457). England: Pearson Education Limited.

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Robert M. Schindler and Lori S. Warren (1988) ,"Effect of Odd Pricing on Choice of Items From a Menu", in NA - Advances in Consumer Research Volume 15, eds. Micheal J. Houston, Provo, UT : Association for Consumer Research, Pages: 348-353. Retrieved March 5, 2013, from http://www.acrwebsite.org/search/view-conference-proceedings.aspx ?Id=6650

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