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Product Positioning and Competition: The Role of Location in the Fast Food Industry

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  • Raphael Thomadsen

    ()
    (Anderson UCLA, University of California–Los Angeles, 110 Westwood Plaza, Suite B 412, Box 951481, Los Angeles, California 90095)

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    Abstract

    This paper examines optimal product positioning strategies of asymmetric firms in the context of retail outlet locations in the fast food industry. The relationships between profits and product differentiation reveal that both McDonald's and Burger King are better off avoiding close competition if the market area is large enough. However, in small market areas, McDonald's would prefer to be located together with Burger King rather than have the two outlets be only a slight distance apart. In contrast, Burger King's profits always increase with greater differentiation. Offsetting these incentives is the desirability of locating centrally to appeal to the most customers. The equilibrium depends on the market's size. In small markets, McDonald's locates near the center of the market, and Burger King locates to the side of the market. In larger markets, McDonald's and Burger King choose locations on opposite sides of the market, although McDonald's locates closer to the optimal central location than Burger King. I also show that the role of price competition on product positioning is fundamentally different under asymmetric competition than under symmetric competition. Price competition unambiguously induces symmetric firms toward differentiation. In contrast, with asymmetric firms, price competition shifts Burger King's incentives toward locating closer to McDonald's, even while price competition increases McDonald's desire for differentiation. As a result, equilibrium locations with asymmetric firms are approximately the same, regardless of whether prices adjust with location.

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    File URL: http://dx.doi.org/10.1287/mksc.1070.0296
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 26 (2007)
    Issue (Month): 6 (11-12)
    Pages: 792-804

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    Handle: RePEc:inm:ormksc:v:26:y:2007:i:6:p:792-804

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    Related research

    Keywords: product positioning; pricing research; geographic competition; fast food;

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    Cited by:
    1. Deck, Cary & Gu, Jingping, 2012. "Price increasing competition? Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 84(3), pages 730-740.
    2. Draganska, Michaela & Seim, Katja & Mazzeo, Michael, 2007. "Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions," Research Papers 1982, Stanford University, Graduate School of Business.
    3. Ding, Yucheng, 2014. "Why Branded Firm may Benefit from Counterfeit Competition," MPRA Paper 52933, University Library of Munich, Germany.
    4. Jacint Balaguer & José Pernías, 2011. "Measuring the effect of local competition on prices in a context of spatial differentiation," Letters in Spatial and Resource Sciences, Springer, vol. 4(2), pages 109-116, July.
    5. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
    6. Toshihiro Matsumura & Noriaki Matsushima, 2009. "A small firm leads to curious outcomes: Social surplus, consumer surplus, and R&D activities," ISER Discussion Paper 0742, Institute of Social and Economic Research, Osaka University.
    7. Michaela Draganska & Sanjog Misra & Victor Aguirregabiria & Pat Bajari & Liran Einav & Paul Ellickson & Dan Horsky & Sridhar Narayanan & Yesim Orhun & Peter Reiss & Katja Seim & Vishal Singh & Raphael, 2008. "Discrete choice models of firms’ strategic decisions," Marketing Letters, Springer, vol. 19(3), pages 399-416, December.
    8. Elizalde, Javier, 2013. "Competition in multiple characteristics: An empirical test of location equilibrium," Regional Science and Urban Economics, Elsevier, vol. 43(6), pages 938-950.
    9. Nathan Yang, 2011. "An Empirical Model of Industry Dynamics with Common Uncertainty and Learning from the Actions of Competitors," Working Papers 11-16, NET Institute.
    10. Zacharias, Eleftherios, 2009. "Firm entry, product repositioning and welfare," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1225-1235, November.
    11. Gayle, Philip & Luo, Zijun, 2012. "Choosing between Order-of-Entry Assumptions in Empirical Entry Models: Evidence from Competition between Burger King and McDonald’s Restaurant Outlets," MPRA Paper 51259, University Library of Munich, Germany, revised Sep 2013.
    12. Jun, Duk Bin & Kim, Jungki & Park, Myoung Hwan & Cha, Kyoung Cheon, 2012. "Modeling patronage shift to a new entrant for predicting disproportionate losses for incumbent outlets," International Journal of Forecasting, Elsevier, vol. 28(3), pages 660-674.
    13. Guerra, Alexandre & Moita, Rodrigo, 2011. "Entradas e Bandeiras: A Estratégia de Interiorização das Cadeias de Fast Food no Brasil," Insper Working Papers wpe_247, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    14. Jacint Balaguer Coll & José C. Pernías, 2010. "Spatial density, average prices and price dispersion. Evidence from the Spanish hotel industry," Working Papers. Serie EC 2010-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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