Pricing, Profits, Market Structures

This activity is appropriate for the Microeconomics Principles course.
Students should have prior knowledge about characteristics of various market structures.
No limit on class size.
One 50-minute class period would be sufficient for this activity.

Overview

This activity requires students to examine the Food truck market and identify their decisions of parking and operating in this market. A Planet Money podcast is assigned prior to class which emphasizes the importance of parking spots in profit maximization and shut down decisions of a food truck. The NPR podcast describes the food truck market in NYC- how location, food menu, regulatory costs, food truck versus carts dictates profits earned by the vendor. In class students will discuss the podcast and answer questions in the context of the podcast. The activity will reinforce their understanding of specific market structures and their characteristics.

Expected Student Learning Outcomes

Upon successful completion of this learning activity, students will be able to:
Identify barriers to entry and differentiate barriers to entry across perfect and imperfect competitive markets.

Information Given to Students

Students are required to listen to Planet Money podcast "How to make it in the food truck business" prior to class.
Activity:
Consider your family's decision to open a food truck. They are asking you to help them understand the market and chances of them succeeding. To help them in their decision making process, what do you think is the most important barrier to perfect competition in the food truck and cart industry?
A. The physical distance between food trucks and/or food carts.
B. Consumer preferences for a particular food pod (some like Korean food, others Italian, etc.)
C. Differences in the tastiness of the food among trucks and carts offering otherwise similar food.
D. City regulations that limit the number of food trucks and carts that can exist.

A food truck's pricing behavior and cost structure can vary its profits depending on the market it is competing in. Pricing decisions are influenced by elasticity of demand (preferences), number of competitors while regulatory costs of operating (eg, parking permits) can add to the cost structure. In the podcast, the effect of barriers to entry in the market in the form of access to a location for operation has been identified as the most important factor for the food truck's operation. Food trucks operating in NYC commercial areas are expected to have similar pricing of food and profits they earn, yet food is differentiated and consumers may have preferences of one over the other. This is a good example of a market that has characteristics of a perfectly competitive market as well as a monopolistic competitive market as defined by consumer preferences.
Additional dimensions that can be incorporated to focus on barriers to entry are the distribution of permits, such as food truck owners who secure parking permits, those who fail to secure a permit and exit the market, other food vendors such as brick-and-mortar restaurant owners.
The podcast needs to be assigned before class. Students should have prior knowledge of characteristics of various market structures. The activity requires students to rank explanatory factors to demonstrate their understanding of firms operating in a competitive market.
The instructor can ask students to identify barriers to entry. They can differentiate barriers to entry in the context of perfect and imperfect competitive markets.
All options except A are plausible and discussion worthy. The instructor can hone in on options B and D to best support the barriers to food trucks operating in a competitive market.
The following follow-up questions are recommended for facilitating the debriefing conversation:
1. Would you characterize the food truck market as perfectly competitive? Explain.
2. Would you say the competition among food trucks and carts would lead to uniform pricing across vendors? Explain your answer.
3. Comment on the costs the food vendors will have to bear considering the parking and regulatory constraints.
4. Based on your answers above for pricing and costs, do you think all food vendors will earn similar profits?
Closing remarks: To conclude the activity the instructor can provide examples of other markets which can be classified as perfect to monopolistic competition depending on consumer preferences such as radio stations.

Do you think it would be a good idea for the New York City Mayor Eric Adams to designate food truck parking spots in the City by selling permits for the spots to food truck owners by auction? What type of market structure will emerge from this policy?

https://www.npr.org/sections/money/2016/05/18/478563359/episode-366-how-to-make-it-in-the-food-truck-business