Name of company: Mister Donut
We are selling doughnuts and coffee where we sell them in a standalone stall. Mister Donut is a franchise of the popular chain in Japan and Taiwan. A franchise is that uses one's branding and follows their practices as well as their business philosophy. They are given the rights to distribute the products, techniques and trademarks with a royalty fee.
2) Which market structure is your firm like to fall under? Explain why.
We are a firm that is in a monopolistic competition as there are quite a large number of firms in in this line of business. There is a slight difference in our products compared with our competitors and there are no barriers of entry into this line of business.
3) What is allocative efficiency?
It is a situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income. In a business, the allocative efficiency will be increased as long as increasing the activity involves a greater marginal benefit than marginal cost and will eventually will reach its optimum efficiency level.
4) What is productive efficiency?
It is a situation where firms are producing their output at its minimum cost, or producing the maximum output for a given amount of inputs.
5) Who are some of your competitors? Name these firms.
We have many competitors since there are a lot of doughnut shops around. The largest competitors include Donut Factory, J.CO Donuts and Coffee, Donut Empire, Dippin Donut and Missy Donut.
6) When there are barriers to entry, it is difficult for firms to enter or exit the industry. In order to keep out new competition, your firm may want to erect barriers to entry. What kinds of barriers to entry are you going to erect for your firm? How do you go about doing it?
We will exploit economies of scale, particularly marketing economies and risk-bearing economies. We will open branches to increase output and profit and diversify into other products and dining concepts as well. That said, we will increase our input in the long-run. Set up our first stall in a high traffic volume location to have a strong customer base in order to remain profitable. We will try to have a strong brand name here which will be easier since it is a franchise where it has been well established in other markets. We will use this to our own advantage and have customers who will continue to have brand loyalty even if other shops open. This will be done by introducing new flavours into the market and by selling a larger variety of food items e.g. sandwiches and ice-cream in the long run. Also, we will advertise frequently in order to attract new customers in order to keep customers loyal and increase our customer base. We will also have offers such as buy one get one free or a free coffee with a purchase of the doughnut occasionally. This will make them return as they are able to stretch their dollar here since they are actually paying less compared to other shops where they have to pay seperately for both the doughnut and the coffee.
7) Using economies of scale is also a form of barriers to entry. Which types of economies of scale will your firm be trying to reap from?
We will be using internal economies of scale where our long run average costs will fall as more units of input is added to produce a larger amount of output. This results in an increasing returns to scale as our short We will primarily use marketing and risk-bearing economies, but will also be exploiting other forms of economies of scale.
Marketing economies:
When our firm increases it size, we will start to buy in bulk as we will start to see a decrease in our costs due to the discounts and will be able to earn a larger profit rather than buying in small quantities. Also, we are able to advertise more than the newcomers as we are much larger in size and have an advantage over them as we have built up a strong brand name for ourselves where we have a loyal following of customers. Compared to the start-ups, our cost of advertising is actually low albeit we do spend a lot on advertising in order to increase our customer base (to know of our existence) as well as profits and output. Our advertising cost per unit of output is likely to be much lower than that of a small doughnut shop.
Technical economies:
We are able to practice division of labour and fully utilise our machines (capital) compared to small doughnut shops as we will use machinery much more efficiently than others. We are able to divide the work among the workers and this raises productivity as well as decreases our labour costs.
Risk-bearing economies:
We are able to diversify into selling other doughnut-related products, savoury foodstuff or other desserts as well if necessary. More outlets could be opened to increase our output and profits and we are able to spread our risks should one outlet's business fail to suffer and we still have other outlets to remain in the black. A cafe could be opened to increase our output so that they can have a place to sit down and enjoy their purchase. If the demand for doughnuts decreases, we could always rely on other products to remain profitable as a result of selling a variety of products.
Economies of scope:
We are able to produce our doughnuts and coffee much cheaper compared to a shop that simply sells doughnuts where our overhead costs and financial economies can be shared among the products. We are thus able to benefit from the shared marketing and distributing costs of selling doughnuts and coffee compared to simply selling doughnuts.
Administrative economies:
We are able to hire more specialist staff such as sales managers, food consultants, and accountants to deal with various positions in our firm. This will then improve productivity and efficiency as specialisation allows everyone to work what they are best at. This allows us to reduce our costs as a result and have a good management team.
8) What kind of price or non-pricing competition (pg 123) will your firm engage in?
We are engaged in non-pricing competition which is competition that is in terms of advertising or product development. We do this as it is more profitable than selling at a lower price generally even though there will be an increase in the costs. We will distribute flyers where they could exchange it for a free doughnut/coffee or get one at a discounted price. We will also constantly advertise in different media outlets when we have promotion or have opened another outlet to increase our profits and to have a good brand name. This will lead to an increase in the demand for our products as well as our total revenue since we are able to persuade consumers to purchase our products by having promotions occasionally.
9) Are you going to practice price discrimination (pg 129) to gain more revenue?
We are using second degree price discrimination where we charge consumers different prices based on how much they purchase. It will be cheaper to buy a dozen doughnuts than half a dozen doughnuts on average as we charge a lower price for buying a box of one dozen of doughnuts compared to buying half a dozen doughnuts. Thus, it is more expensive to just buy one doughnut compared to half or a dozen of them. This will be beneficial to us as we will gain more revenue and will be able to maximise our output and profit.
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