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Monopolistic Competition Of Restaurants In Pingshan Road Community

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For my extended essay I chose to investigate the competition among the restaurants in Pingshang Road Community; thus my research question is "How do the restaurants in Pingshan Road Community compete with each other?" As my further investigate, I hypothesize that a certain degree of cartel among the restaurants could help them to compete more effectively with others? "Also, attempting to analyze what factors could affect the consumers to make their optimum choice (non-price competition).

The analysis of the market environment suggests that the six restaurants in Pingshan Road Community compete with each other in a monopolistic competition situation. Through further investigation comparing the price list of homogenous dishes within similar flavor restaurants, I reached the conclusion that the conditions of collusion were not being proven to be present. First of all, Ju Xing Yuan and Golden Palace are more expensive than others; because it has achieved brand loyalty and consumers have already taken the higher price for a better service into account. Secondly, Shiweitian Fast food charges lower prices than others; due to its Economies of Scale and being able to provide better facilities and various Chinese dishes to the consumers.

They chose to compete not only with, but also non-price competition, for example, by offering better facilities and service.

Reasonable prices

Relatively good facilities and services

Successful differentiation of products

Brand loyalty

Location (convenience)

Introduction

Research question:

The type of the Pingshan Road Community restaurants competition market.

Tianjin Experimental High School is one of the top five distinguished school acknowledged by Tianjin municipal government which fostered hundreds of outstanding students in past decades. In order to satisfy the higher taste requirement of massive amounts of students, increasingly restaurants were opened to attract young fashion teenagers to become the main consumers. During the first two years of my secondary school, I had my lunch at school with my friends. The canteen provided us about 14 sorts of yummy dishes and commodious space that you can enjoy a meal comfortably. Suddenly from 9th grade, the number of junior students increases dramatically and the dishes that canteen provided became progressively worse. As a result, I started to have lunch like many others outside of school. In the Pingshan Road community (Appendix 1.1), some restaurants devoted in one area's cuisine, for instance, the restaurant of Xinjiang and the Lanzhou noodles. Several restaurants provide traditional Chinese dishes similar to the school canteen. By enrolling in IB Economics course and studying of market structures, I developed an intense interest to work out how restaurants compete with each other.

Why I chose this topic

There is an old saying "food is the paramount necessity of the people" in China. Consequently, the restaurants status quo around my school area became extremely intriguing for me. Also, my colossal eagerness led me to investigate the behavior of restaurants in Pingshan Road Community and the non-price competition.

Market Profile

Tianjin Experimental High School (TEHS) is the place where I have been studying IB programs for almost 6 years. It is locate on the Pingshang Road Community at the centre of Hexi District. As one of the top five key high schools, TEHS has been famous for its diversity campus and innovative international education. Since the settlement of the new campus on Pingshang Road, numerous amounts of people came and opened their restaurants in order to attract students and local people. However, the consumption level of students is far less than adults thus they are liable to stay in the tidy canteen of school. As the result, many eateries exited the market in the early years. According to my research, there are 6 small-size restaurants are sharing the market with school canteen now. In fact, there are more than 6 restaurants in the Pingshang Road Community. However, as the previous research shown, the prestigious café and restaurant like UBC coffee (from Taiwan) and Sichuan Hotpot are far above the consumption level of students. As a result, I chose the top six restaurants where can both satisfied the need of students and only take five to seven minutes walking distance from the school.

The restaurants around Tianjin experimental high school (TEHS):

Xinjiang restaurant

Lanzhou Noodles

Ju Xing Yuan (s)

Golden palace (s)

Food is God (Shiweitian Fast Food)

Yummy

The distribution of restaurants

Relevant Definitions

I will present the four market structures and their basic assumptions now.

Monopoly

Monopoly market model is one with theoretical extremely pricing power.

The assumptions of monopoly market:

Single Seller: There is only one seller supplying the market.

Market power: A monopoly firm will have a great deal of power in the market and it is able to set up the prices as they want (price setter).

Very high Barriers to Entry: There are three major types of barriers to entry; technical, legal and deliberate.

Technological Superiority: Firms attempting to enter the market could suffer from technical barriers first, where the monopoly company enjoy decreasing marginal costs over the span of market demand, for instance unique techniques and producing methods.

No Substitute Goods: A monopoly sells a good for which there are no close substitutes. Control of Natural Resources: A prime source of monopoly power is the access to a certain resources. It is critical to the production of a final good.

The demand curve of monopoly

Oligopoly

The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion.

An oligopoly has some key defining characteristics, namely that the market is dominated by a few large companies (usually four or five) manipulate a major share of the market (over 40% of the market. Moreover, potential entrance standard is fairly high (a key difference to the monopolistic competition)

Ability to set price: Oligopolies are price setters rather than price takers

Entry and Exit: Barriers to entry are high. The most important barriers are economies of scale, patents and access complex technology.

Number of firms: There can be a handful of firms in the market, but only a few of them dominate the market. There are so few firms that the actions of one firm can influence other firms.

Product differentiation: Product may be standardized, steel, or differentiated.

Perfect Knowledge: Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete

Perfect competition

Perfect competition describes the perfect being a market in which there is many small firms, all producing homogeneous goods.

The assumption of pure competition:

There huge amount of companies in the market

The companies have identical goods

There are no barriers to entry or exit the market

They are price takers.

all sellers and buyers have perfect knowledge of the market conditions

each firm is a short run profit maximiser: firms operate under the profitmax condition of setting output at MC=MR

In addition, making abnormal profits by existing firms will result in new entries into the market. Firms that have losses shut down and leave the market in the long run.

1

Monopolistic competition

The assumptions of a monopolistic competition market are almost the identical as the model of perfect competition. For instance, many competitors, no entry barriers, the abnormal profit is only available in short run and the firms have perfect knowledge.

Characteristics of Monopolistic competition:

Large number of providers, and all of them are independent competitors with relatively small market share, therefore firms don't have many incentives to collude.

In monopolistic competition, firms having heterogeneous products and that involve a great deal of non-price competition (based brand reputation and so on).

Firms are not entire price-taker but a price-maker to some extent.

Short run equilibrium

Long run equilibrium

Hypothesis

A monopolistic market

To begin with, I hypothesize the bout among the restaurants and the school canteen is monopolistic competition due to several characteristics below:

1. There exist plentiful competitors

2. They don't produce same goods (some of them are similar)

3. They have nearly perfect knowledge on the market prices

Also, I hold that the restaurants in Pingshan Road Community do not fit this characteristic as restaurants are more fitted with independent decision making.

As a result, it would possibly help the restaurants compete with the school canteen more effectively, avoid the competition with each other and gain more customers from the school canteen by a certain degree of cartel or collusion among the several blocks.

Such industry might have characteristics of both oligopoly and monopolistic competition.

Approach

For the purpose of testing the hypothesis above, a design of research will be elaborated. To begin with, I formed a list that inclusive of the specific prices of the dishes in each restaurant in order to compare the price discrepancy. Moreover, the dishes I chosen are selected from the menu that always be ordered by students according to the market survey questionnaire (Appendix 5) I designed. The dishes are present in the menu are for the aim of representing a homogeneous comparison.

I will survey a proportion of the student body and take the initiative to conduct interviews with the head of Tianjin Experimental High School to get familiar with the viewpoint of school canteen management strategies.

With the further analysis of the data, we can deduce that whether the restaurants have formed collusion and what factors would affect consumers' best choices.

Data collection and analysis

The type of restaurants competition market

In my hypothesis, I supposed that the Pingshan Road restaurants market has both the characteristics of oligopoly and monopolistic competition. Now I am going to investigate what kind of competition virtually is it.

The number of firms

Obviously, it is fairly hard to distinguish the type of competition by simply counting the quantity of competitors in the market. In Pingshan Road Community, the six restaurants I chosen are only a part of the market. Along the 3 kilometers long Pingshan road, there are about 17 restaurants and café available for the consumers (larger place always has more firms inside, but in such a small area, 17 is too much). The reason why I chose this six restaurants are mostly due to its consumption level is closer to my life.

As the number of firms decreases, the firms tend to behave more like oligopoly and less like monopolistic competition.

Market share

Secondly, an oligopoly market status depends more on the dominance of a few firms rather than the total number of firms in the industry. In here, it is extremely difficult to gather the statistics in order to work out which restaurants dominant more sharing of the market.

Table 2 [2] :

Research data of the breakfast time consumers' number (from 7:00 a.m. to 10:00 a.m.)

Geographic Area

In other cases, the geographic size of the market is the prime determinant of market structure. A particular industry might be monopolistic competition in a large city, but oligopoly in a smaller town. Retail sales offer an example. Smaller places tend to have fewer stores, perhaps a single super center or shopping mall and a handful of stores located in a small area. Such a market would be oligopoly.

However, we can clearly see from the satellite photo below, that Pingshan Road is only 2 kilometers long, it is relatively a tiny place for six or more restaurants to compete.

Pingshan Road Community

Barriers to entry

A key difference between oligopoly and monopolistic competition is the barriers to entry. The barriers of oligopoly are very high. Nevertheless, there is no evidence support that the restaurants in Pingshan Road need any special government permission or relatively high start-up cost. Normally, the larger places that the restaurants owned hinder a greater amount of initial investment. As the table below demonstrated, each restaurant selects the size of their business area in accordance to their available capital. Maybe the entry barriers are high early on, but these entry barriers can change over time, and transforming the oligopoly into monopolistic competition.

Does it inclusive a certain degree of collusion between the homogenous cuisines for the aim to compete with others more effectively?

My original hypothesis is that a cartel between homogeneous cuisines would assist them to compete with others.

Due to diverse cuisines they provided in the Pingshan Road community, I divided them into three groups: Traditional Chinese cuisine, Xinjiang cuisine and fast food selling model. Then, I assume that they did have some sort of collusion, so that the restaurants selling similar cuisine would try to charge the identical prices for their products.

Regarding the price menus below, we can observe that the restaurants are charging different prices, which means that there is no price fixing among them.

A new menu including every restaurant:

Lastly, in theory the MC market share nearly perfect information, but from their attitude toward my behavior when I was taking picture of the menu, I experienced extremely strong hostility and witnessed their awfully rude behaving.

Assuming all the restaurants have agreed to join the cartel, there are still some severe problems involved. Firstly, the quantity of restaurants is rather difficult to successfully organize and communicate. Secondly, the products sold by restaurants are differentiated will affect the ability of monitoring and therefore sustainability of the cartel.

As a result, I reached the conclusion that my hypothesis of collusion among several blocks of restaurants cannot be proven.

The factors affect consumers' optimum choices (non-price competition)

Now I am going to further investigate the non-price competition despite of different prices among the cuisines. In order to investigate the quality of food and the facilities of each restaurant, I spent an entire week during the labor days' holiday to taste all the restaurants around. As a result, I found that all of their taste is very delicious, but the sanitation of Lanzhou Noodles and Xinjiang restaurants is quite terrible. Although the facilities of those two restaurants are quite bad, there are still lots of students would like to pay the bill for a yummy lunch (I conclude the statement above by observing the numbers of consumer in those restaurants at the lunch time as below).

Table 2 [3] :

Research data of the breakfast time consumers' number (from 7:00 a.m. to 10:00 a.m.)

After my daily observation of particular restaurants, it suggests that Lanzhou noodles and Shiweitian fast food are more competitive than others in the breakfast time. Since Chinese people don't prefer rice for breakfast, but noodles is acceptable for an energetic start of a fruitful day. Also, the Shiweitian fast food provides a variety of traditional local breakfast to the consumers from nearly 6:30 a.m.

From table 4, we can see that the vast majority of the restaurants hope to satisfy the needs of consumers to gain more regular customers by providing extra facilities and services.

However, fantastic facilities didn't give them a chance to attract the students. The prices they set up are far overwhelming students' capability (who will spend 40-80 RMB every lunch and still feel hungry?).

If the restaurants are competing with the school canteen in terms of price, they would charge a lower price than the canteen. By charging such price, the restaurants provide similar dishes for customers will attract more students from TEHS.

Compared with the school's prices, the prices of restaurants are highly uneconomical. Golden Stay and Ju Xing Yuan, they charging higher prices than others is mainly because the type of Chinese food they provided are traditional dishes [4] , and more spaces form a higher production cost. Another essential factor is that they have built up their brand loyalty (Appendix 5) already. On the ground of questionnaire outcomes, the brand loyalty [5] here is more likely to refer to the taste of the food and the efficiency.

Moreover, the school canteen no longer offer special dishes to students in May, change to provide packed lunch. After deep consideration, I deduce that there are several reasons for canteen's transformation. First, the school canteen wants to consolidate its status as the dominant supplier in the market. Secondly, the variable taste of restaurants had posed a threat to the benefit of canteen, as the tendency seems unstoppable, they diminish the offering of traditional Chinese dishes and put their eyes on the sales of dishes in sort of fast-food selling mode.

In order to survive in this competitive market, some of the restaurants put intense effort on concentration of the innovating new dishes, meanwhile, they are also struggling for sorts of special (even strange) names for the old dishes to attract vogue youths. Brand name products of the same type (for instance, cookies) are in monopolistic competition because they are not the same uniform item, but somewhat different. Customers have to pay a higher price for brand name products, but they do not seem to mind too much.

It is another evidence to support the vast array of new products is quite often the result of non-price competition, which often takes place in monopolistically competitive firms.

As the data shown and analysis above, the non-price competition is truly existed among the restaurant. We can conclude that the restaurants charge a relatively reasonable price at the first place and offer better facilities and environment are more popular than others.

The location of the restaurants can also influence the decision that made by consumers. A very stimulating trend that I found is the so-call "direction phenomenon". It was made by myself and my classmates, as the map shown, on the right side of school there is only one restaurants-Shiweitian Fast food(we named it Food is God in English). Conspicuously, it enjoys their economies of scale [6] .Its highly reputation was built by the effective leadership and management [7] and well-trained faculty of Shiweitian Fast Food. The larger the firm is, the more likely it is to be able to negotiate good contracts [8] for the bulk buying [9] of materials. The good relationship among them guarantees the consistent supply of fresh vegetables and meats every day. It is a typical benefit of economy of scale.

As my research suggest, the annoying atmosphere of the school canteen and the unwelcoming services of stuffs list on the top five reasons not to eat at school as well.

At the end, I confirm that the more consumers feel a product to be substantially different, the more successful the firm will be (more abnormal profit in the short run).

Conclusions

The purpose of my essay is to investigate the type of competition into the restaurants on the Pingshan Road Community and the consumers' behavior under this type of competition.

It was found that restaurants operate under the conditions of monopolistic competition that characterized by the involvement of non-price competition. In addition, theoretically the producer in this market has a certain power to set up the price and they wouldn't afraid of highlighted competition, but in the Pingshan Road Community the outcome is devastated. Yummy is a typical bad example for all the restaurants runners, it opened in January of 2009 and closed in May. Its false expectation of consumption level directly impacts the initial investment of the runner, and then result in. A restaurant should accept customers as long as the additional or marginal revenue exceeds the additional or marginal cost of

the last meal served.

Hence, the data collected and analyzed indicated that my original view that this market has both the characteristics of oligopoly and monopolistic competition is untenable. All of them have no cartel or collusion to increase their revenue and gain more customers (actually they don't have to). Faced with many competing brands in a monopolistically competitive environment, consumers can be said to construct consideration sets on the basis of following factors to choose from among competing brands. If an individual is intending to be a outstanding manager in the Pingshan Road Community, the individual should give priority to the optimization of an overall reasonable prices. Then, as the investigation reflects, the non-price competition plays a pivotal role in this market. Therefore it is crucial to offer better services and facilities and capable to differentiate the products successfully. Improvement of consumers' loyalty to brands will allows restaurants to maintain a comfortable position in the market as a result. Additionally, the location could also contributes to the restaurants' performance, especially during the awful weather, the closer to school the more revenue will be made.

Evaluation

There are some limitations in my study. All of the conclusions above are based on the assumption that students as the major consumers. There is no denying that still vast customers like the workers or dwellers to purchase the products.

Overall, the results in this study can only reflect the situation of restaurants market in Pingshang Road Community, may not apply in more areas due to the untypical character and immature market system. Further, price discrimination [10] is also exposed through my investigation. It would take place, in the case that you are a regular customer. The restaurants like Golden stay and Ju Xing Yuan, they don't have any restricted rules to follow, they will do anything they can to survive in the community. If you buy more dishes, then they will charge you a relatively lower price. This phenomenon is not what I expected initially and should be further examined in future research.

Bibliography-acknowledgement

Books:

Gillespie, Andrew, AS & A level Economics through diagrams. Oxford: Oxford University Press, 1998

McGee, Matt. Economics- In terms of the Good, the Bad and the Economist. Victoria, Australia: IBID Press, 2005.

GAns, J., King, S., & Mankiw, G. (2003). Principles of Microeconomics: Second Edition. Australia: Thompson.

Websites:

Tutor2U.Microeconomics-price discrimination.

http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html (Accessed July 24th 2009)

Tutor2U.Oligopoly.

http://tutor2u.net/economics/content/topics/monopoly/oligopoly_notes.htm (Accessed July 25th 2009)

Economicshelp. Price discrimination

http://www.economicshelp.org/microessays/pd/price-discrimination.html (Accessed October 2nd 2009)

Tianjin Shiweitian Fast food official site.

http://www.tj-swt.com/index1.asp (Accessed May 5th 2009)

California State University, Chio.

Frederica Shockley [11] personal blog

http://www.csuchico.edu/~fshockley/syllabi/monopolistic/ (Accessed September 15th 2009)


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