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Economics Case

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You would need to define the market. Let's assume we define it as undergraduate institutions providing BA/BS degrees. From the intuitive level you would look at the three things that would define possible substitutes: all schools that have the same or similar product performance characteristics, all schools that have the same or similar occasions for use (the when, where and how it is used), and all schools in the same geographic market. You would next have to survey current students at the "elite" schools and at substitute schools to obtain information on their decision to attend based on costs and on other reasons. This would allow you to look at both the catchment area. I am not sure but I believe you need to say something about idiosyncratic reasons. DavidSubmarkets? I believe that high-end establishments represent a submarket. This partly due to idiosyncratic reasons and due to a lack of price sensitivity of their customers. David

Also submarkets exist with the drive-thru/fast food submarket, this submarket is tied to convenience and bare bones pricing and prices tend to correlate much closer within these types of firms than they do between these types of firms and casual dining firms. There is also submarkets tied to the style of cuisine. Mexican restaurants tend to be priced lower than steakhouses, and Chinese specialty restaurants are unique in their pricing structure compared to Italian specialty restaurants. (SETH)

Substitutes that constrain pricing? yes, The ready to eat frozen food market in grocery stores along with meals prepared to eat (deli) in these same type stores directly compete to lower prices. David

The restaurant market is constrained pricing wise by substitutes. The demand in the restaurant market is comparatively elastic to other markets with food being a necessity and also comprising a somewhat large percentage of a consumers income. Thus the alternatives of eating at home and eating ready made foods from grocers provide acceptable substitutes to the restaurant market. (SETH)

How can they be profitable? This is a lowmargin industry that relies on volume. David

To maintain profitability in the market it is necessary to first differentiate your product from competitors on either a level of food quality, atmosphere or price. The industry is volume driven as a large percentage of costs are not directly tied to the number of customers (i.e. franchising fee, rent, investment in kitchen equipment, overhead, advertising, and in some ways labor), but more driven by investment needs. Thus the economies of scale play a role in being competitive on a cost structure level. Also the low switching costs and large number of viable substitutes limit a firm's ability to control pricing in their operations as demand is comparatively elastic. Lastly building and maintaining customer loyalty plays a significant role as 80% of a restaurants



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