Activity - Jamie's Kitchen
It is always tempting when looking at market structure to investigate the likes of Microsoft or the supermarkets but interesting cases can be found all around in relation to how firms behave and the complexities of analysing market structures.
We tend to assume that monopolies, for example, are large firms who dominate national and international markets - this can be the case but is not always so.
Jamie Oliver is a famous TV chef: he made his name from the BBC TV series 'The Naked Chef' and a book of the same title. A contract with retailer J Sainsbury followed a year later in 2000, which reportedly made him a millionaire. He then produced a programme for Channel 4, entitled 'Jamie's Kitchen', which focussed on training 15 unemployed youngsters in the catering business. The restaurant 'Fifteen' came out of that experiment.
Noted for his down-to-earth cockney persona and willingness to experiment and take risks with his food, as well as his passion for sourcing only the best ingredients, Oliver's restaurant was up there with the best in terms of the prices and reputation he garnered.
However, that reputation was called into question following the publication of a restaurant guide that was scathing in its criticism of Oliver's restaurant. The guide, Harden's, is written by those who visit the restaurants. Visitors to 'Fifteen' commented on the surly behaviour of staff, poor quality, uninspiring and expensive food and that the restaurant was devoid of atmosphere. The guide put 'Fifteen' at the bottom of 32 restaurants in its class - those being high priced restaurants. The average price of a meal at 'Fifteen' is around £70 per person.
'Fifteen' is a not for profit business and as such is a charity. Oliver's representatives have replied, commenting that the visitors' experiences were up to 18 months old and that measures had been taken to rectify the problems highlighted. The top chef in the guide was fellow TV star Gordon Ramsay. Ramsay's programmes have highlighted the commitment to the very highest standards in all aspects of the business and, so say his supporters, comes from having gained his experience as a working chef - something that Jamie Oliver had been accused of not possessing.
Tasks
You have the background to the story. Consider the following questions.
1.Which market structure best describes the restaurant industry in the UK?
2.Given your answer to question 1 above, explain what the short and long run equilibrium position for such a restaurant and the industry would be. Justify your view with reference to the industry and the market being considered.
3.In what ways might a restaurant such as 'Fifteen' differentiate its product/service?
4.To what extent would you suggest that a restaurant such as 'Fifteen' can exercise monopoly power?
5.On what basis could the market in which Oliver's restaurant is operating be termed an oligopoly?
6.In what ways could restaurants such as 'Fifteen' behave in a collusive manner and what might be the benefits and difficulties of engaging in such behaviour?
N.B. There is no suggestion or evidence whatsoever that 'Fifteen' or any other similar restaurant is engaging in such activity - this is a purely hypothetical question.
7.Evaluate the strategies that 'Fifteen' could adopt to regain its market position.
Some Hints:
To help you with your analysis, you may wish to consider the following points:
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| What type of market structure would a particular restaurant be in? What factors would influence your answer? |
•You will need to think about the market in which the restaurant sits; is it in a market with all restaurants or is the fact that it has tried to differentiate itself mean that it is in a part of the overall market for eating out? If it is the former, then you would have to consider McDonald's, for example, as being a rival to 'Fifteen' - how appropriate is that?
•You might, therefore, conclude that the restaurant sits in a small market consisting of high-price, high-quality restaurants. If that is your conclusion, the market structure might be quite different and as such, the behaviour and the short and long run outcomes equally so.•When you are considering your answer, think about the characteristics of the market structure you think it might be in and try to identify how closely those characteristics match with the restaurant industry. Look at the Presentation to remind yourself of the characteristics.
•Question 2 is designed to assess your understanding of the diagrammatic representation of market structures. You would be expected to be able to understand the difference between a short-run position and a long-run one. It is advisable to ensure that you understand how to read graphs properly (many people think they can but when it comes to the analysis...) and that you understand the relationships between marginal and average data and the relationship between total, marginal and average data.
The latter also implies that some understanding is necessary of the price elasticity of demand for products. You can remind yourself of these relationships by looking at this supplementary Presentation on total and marginal values (search 'marginal values' on this blog).
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| How can restaurants differentiate the product and service they provide? |
•Question 3 should be relatively straightforward; there are clues in the text about this - think about location, ambience, character, price, quality, service, etc.
•Question 4 is seeking to assess your understanding of the subtleties involved when discussing monopoly power. Firms such as Microsoft may be big enough to wield monopoly power in fairly obvious ways - although they might claim that they are not, which is an interesting discussion in itself - but small firms can also exercise monopoly power. It may tend to be localised in nature. You will have to explain what the source of the monopoly power is and how it might exercise that power. If you have done this successfully then you will be able to explain what the consequences of such monopoly power might be. The key part of this question are the command words 'to what extent', which is requiring you to make a judgement. In this case, you are expected to judge whether 'Fifteen' is able to exercise strong monopoly power, some monopoly power in limited circumstances or hardly any at all. The answer will depend to a large extent on how you have classified the market structure. Remember to support your judgements with reference to the analysis you have made previously.
•Question 5 takes the issue above one stage further and suggests 'Fifteen' might be regarded as an oligopoly. In this case, it will be assuming that there are a small number of restaurants in the market who can exercise a degree of control over the industry - the industry in this case being high value, high quality, exclusive restaurants.
•Question 6 then takes the above discussion and gives you the opportunity of assessing how collusive behaviour could be organised - think of location, pricing, possibly what types of food they serve, and so on. When considering the costs and benefits the obvious point is to think of the impact on long-term profit levels but you are also asked to think about the problems associated with collusive behaviour - will everyone stick to the agreements, for example? There are plenty of textbooks that give a good explanation of collusive behaviour.
•The last question asks you to consider ways which 'Fifteen' could regain its position in the market - the text again gives some suggestion that they have already taken steps to this end. Think of the problems the guide highlighted and what steps the business could take to overcome these weaknesses. Avoid just saying bland things such as 'they can improve quality'. If you do think this is a way forward, explain how a restaurant can increase quality. This takes your answer to another level! The command word, again, is important. You must evaluate, so if you think quality is important, you must balance this against other measures you have identified to make a judgement as to whether quality is more or less important and why.
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