When people think of competition, they often do not understand that there are far more sources of competitive pressure than other businesses. Individuals might shift to DIY activities, like I did when I could not find sturdy, cheap shelving for my children’s play area. Instead I bought the lumber and constructed my own shelves. Another possibility is that individuals can do without the goods or services, and a third option is that they can buy a substitute product from the same vendor.
A heartbreaking story, a while back, from McDonnald’s announced that they were discontinuing the Angus Burger line of hamburgers. From the story:
But Richard Adams, who consults McDonald’s franchisees, said that the Dollar Menu has also made the Angus burger a less attractive option at around $4 to $5.
“When you can get four or five burgers off the Dollar Menu, nobody’s going to buy the Angus burger,” he said. “The Dollar Menu has become a real problem for these chains.”
Another problem was that McDonald’s wasn’t able to raise prices on the Angus burgers, even as its own costs for beef continued to rise… meaning its customers wouldn’t be willing to pay more than a certain amount for its food…
McDonalds cannot price their items however they please. Customers respond to incentives. McDonalds’ own menu put downward pressure on prices. As Jeffry Tucker might say:
the market system amounts to a giant conspiracy to reduce your profits to zero.
This story, however, has a happy ending. Try the new Bacon Habanero Ranch Burger.