McDonald's

An Oligopoly


An Oligopoly is a type of firm that can be classified by a few characteristics. The technical definition of an Oligopoly is that in which a situation is consists of a small number of interdependent sellers. Each firm in the industry knows that other firms will react to its changes in prices, quantities, and qualities.


SO why is McDonald's considered an Oligopoly ?

Firstly, an oligopoly can only exist when a few firms are dominating the industry and have the ability to set prices. McDonald's can't be considered a Monopolistic firm as it is not a single seller of a good nor has a particular good that is unique. McDonald's however, is clearly one of the leading companies in the fast food industry in the United States as well as internationally in countries such as the Philippines, Canada, and Japan. In the United States, McDonald's in one of the leading companies in the selling of hamburgers along side Burger King, KFC etc.

Interdependence is a key component of an oligopoly. McDonald's rely on the actions of other businesses. Strategic dependence occurs in the fast food industry. McDonald's has to be able to predict the nature of other businesses in order to become a successful. McDonald's is always predicting the reactions of other firms which ensures them to be always strategize

There are many barriers of entry for a business to into the hamburger industry and market. As we have learned the several different barriers that make it difficult for a business to enter an oligopoly.
Economies of Scale: They prevent the entries of newer businesses into the industry. McDonald's long-run average total cost is declining when the size of it's firm is increasing and it's operations. McDonald's is under the economies of scale because as people are buying franchises, they are expanding their size of their firm while decreasing their AVERAGE TOTAL COST.

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Legal Barriers: Patents and government regulation can explain why there are few resulting dominating firms are in the hamburger industry. The government proves to play an important role in the entry of the firm into an industry. McDonald's is aware of the strong and vigorous rules implemented by the government to ensure that food safety is being followed. In the figure down below, it states the importance of meeting the safety regulations of the government. In the first paragraph, it is written that at McDonald's always tries to meet the stringent food safety standards and only works with suppliers who agree with the importance of that commitment. In the rest of the paragraphs, are parts highlighted in yellow which indicates how the government plays a crucial role in the food process. In the second paragraph, it speaks of how McDonald's is always inspecting the quality and safety of the food care. In the third paragraph, it explains how they reach and certainly exceed government regulations (...haha, sometimes). Their supposed standards may prove to be harder for newer firms to compete with McDonald's. In the same paragraph it states how the managers and crew are trained as well as certified to provide an assurance of a proper understanding of how to ensure food safety through training.
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Taken from McD's site - Click to visit

The process of opening a franchise is difficult as well. There are many qualifications that are needed top open a franchise. In the McDonald's website, a person can enter the System by purchasing an already existing restaurant from McDonald's or from an owner or an operator.
There are financial requirements that are needed to met when purchasing a franchise. Similar to purchasing a house, an down payment is needed and required. In the figure below, if a person is interested in purchasing a new McDonald's restaurant, he or she has to pay a down payment of at least 40% of the total cost, while purchasing an already existing franchise, a person must pay 25%. This clearly indicates the high start up costs of entering the industry. So a smaller firm may have trouble entering a system when McDonald's have the majority of the shares of the income. McDonald's normally looks for people who can afford to pay a minimum down payment of at least $500,000 dollars (that's almost as much as my house!) and these people will then be eligible.
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Taken From McD's Website - Click to visit site