Identifying Market Structure in the Fast Food Industry

This activity is appropriate for principles courses. It can be introduced later in the course once students have encountered the theories of monopoly, monopolistic competition, and oligopoly. Students will need to be familiar with the terms market share and market concentration. They should also be generally familiar with government regulation and theories on when it is warranted. There are no class size limitations and this activity should easily fit into one class period.

Overview

In this activity students are provided with market share data on the fast food industry. They are then asked to determine whether this industry more closely resembles a monopoly, monopolistic competition, or oligopoly. Then, they are asked whether they think regulatory action could be warranted either now or in the near future. The aim of this activity is to crystalize in students' minds the important differences between these market structures. The definitions of each market structure vary slightly depending on the source material one uses, and we have noticed this can lead to considerable ambiguity in students' minds. Grappling with a real world example will hopefully cause students to come to a deeper understanding of each of these market structures.

Expected Student Learning Outcomes

After completing this activity, students will be confident diagnosing which general market structure real-world industries resemble.

Information Given to Students

Imagine a family member reads the following market share information for the fast food industry. Since you are taking an economics class they ask you what you think of the industry and if it is fair for consumers. What would you tell them? The fast food industry market share information is as follows:

McDonald's - 17%
Yum! Brands (KFC, Taco Bell, Pizza Hut and more) - 10.8%
Subway - 6.7%
Wendy's Company - 4.4%
Chipotle - 2.2%
Other - 58.9%

What market structure does this most closely resemble? Do you think antitrust action could be warranted? Analyze the data and make a selection between the following choices. According to the market share data provided:

A.) This is clearly a monopolistic industry and antitrust action is warranted to benefit consumers.

B.) This industry has many small players so it is best described as monopolistic competition. Even so, antitrust action is still warranted to benefit consumers.

C.) This industry has many small players so it is best described as monopolistic competition. As a result, no antitrust action is needed.

D.) The small number of large firms indicates this industry is an oligopoly. Antitrust action is warranted to protect consumers from collusion among these firms.

E.) The small number of large firms indicates this industry is an oligopoly. Antitrust action is not warranted, however, as the high level of competition among firms keeps the oligopolists in check.

The precise definitions of which levels of market share constitute which market structure vary from textbook to textbook, sometimes leading to considerable confusion on the part of students. This activity is designed to get them to interrogate their understandings of each structure, and when antitrust action is warranted, using this real world example.

Explanation of Choices

A.) Monopoly / yes antitrust - This choice is included to illustrate a common error students make. McDonald's is an incredibly well known company and commands the highest market share in the industry. News stories will sometimes refer to it as a monopoly. In common parlance, many students might say McDonald's looks like a monopoly. This is not accurate based on economic theory, as a monopoly is a single firm which controls the whole market. McDonald's doesn't even control a fifth of the market so it cannot be called a monopoly.

B.) Monopolistic Competition / yes antitrust - This is another red herring choice. Our theory would never recommend antitrust action in a true monopolistically competitive industry. If students choose this option, it indicates their understanding of the concepts should be deepened.

C.) Monopolistic Competition / no antitrust - This is the first plausible answer. The hallmarks of monopolistic competition are many many firms with low market share, and highly differentiated products. The fact that 58.9% of the market is made up of small operators in the "other" category" is good evidence of the presence of monopolistic competition. The highly differentiated nature of fast food offerings is another good piece of evidence.

D.) Oligopoly / yes antitrust - This is a somewhat plausible answer, but not as strong as C or E. Most definitions identify an oligopoly as a market where a small number of firms control 50% market share. While the four firm concentration ratio here is only 38.9%, many definitions of oligopoly leave the number of firms vague. Potentially, if we included 10 or 12 firms they could collectively surpass 50% market share, but we don't know enough to prove or disprove that with the information provided. This makes the choice of oligopoly plausible. The call for antitrust action is less plausible, however. The potential for these firms to collude looks very unlikely by the numbers, and intuitively seems far-fetched if one has spent time in various fast food establishments. The level of competition appears quite high, potentially reaching "cut-throat" levels.

E.)Oligopoly / no antitrust - As stated above, the diagnosis of oligopoly is plausible and there is clear evidence for competition, making antitrust action unrealistic.

Potential Issues

Students may initially struggle with the vagueness of the definitions of each market structure. Part of the goal here is to show them that there is a great deal of "gray area" and personal judgment in these diagnoses, even among professionals. This example was chosen because this industry data can be seen as a somewhat marginal case where students could plausibly argue multiple potential answers.

Because of the marginal nature of the industry and multiplicity of potential plausible choices, it should be reinforced to students that there isn't necessarily one right answer. This will lower the potential for groups to get stuck arguing passionately about their "right" position in a high stakes manner. It will also encourage them to focus on building out their defense of why they chose what they chose, rather than simply getting the right answer.

Summary / After the Activity

After a hopefully detailed and fruitful discussion among and within groups, the instructor may want to reemphasize that the real world rarely fits neatly into the categories we set up in our intro courses. That is both the challenge and the fun of applying economic theory as a way of understanding the world around us.

Instructors will be able to assess whether students are achieving the learning outcomes based on the depth of their discussions when defending their answers. If students cannot defend their answers and choose at random then they should be given more guidance and encouraged to try again.

A follow-on activity or take-home assignment could be to have students pick their own industry of choice and have them research the market share info of that industry. They could then make the same determination as this exercise with the same choices.

Fast food market share source:

https://www.statista.com/statistics/196611/market-share-of-fast-food-restaurant-corporations-in-the-us/