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guys, I have this doubt that if the fast food industry such as KFC, and Maccas are examples of monopolistic competition how are they still making a profit? Because as per the model in long run the monopoly competition won't make profit as more competition enter the industry ?

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First of all KFC and similar large fast food chain are not a good example of monopolistic firm, at least not in most countries they are more closely related to oligopoly. The reason for that is that by assumption there has to be too many monopolistic firms for them to have any sort of meaningful (game-theoretical) strategic interaction. The number of large fast food chains is not that large and they seem to strategically interact a lot.

Second, the model shows that monopolistic firms do not earn economic profit not that they do not earn profits. Even firm with accounting profit of billions could be earning zero economic profit. The profit that firms report in their quarterly reports and the profit numbers you hear in the news are not the actual economic profit. Those are all accounting profits.

For example, if a monopolistic firm supplies its own capital (machines, building etc) and the company needs 1tn dollars of capital (let's say its a KFC type fast food) and opportunity cost of capital is 5% (let's suppose that's what the owners of capital can earn if they invest the money into something else) then that company can report even \$50bn accounting profit (the number you will find in quarterly reports, news etc) yet that company would still have exactly 0 economic profit. To have positive economic profit the company in the example has to earn more than \$50bn. If the company would earn less than \$50bn accounting profit the company would actually have economic loss.

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  • $\begingroup$ Thank you so much for your clear explanation, when we compare the fast food chains on a global scale can we think of it as a monopolistic competition as let's say barriers of entry to open a small fast food shop is less right ? or is my understanding wrong? Thanks in Advance $\endgroup$ Oct 21, 2022 at 18:58
  • $\begingroup$ @studenthere for chains even globally I don’t believe you can say they are monopolistic. For non-chain fast food restaurants (eg I now live in Utrecht and near my place there is a Dutch family owned fast food that is clearly different from other fast foods like some local Indian family owned fast foods) you could say they are in monopolistic competition. But companies such as McDonald KFC etc they clearly strategically interact with each other. $\endgroup$
    – 1muflon1
    Oct 21, 2022 at 19:07
  • $\begingroup$ @studenthere the thing is that monopolistic competition model only works if we assume that firms do not strategically respond to what other firms are doing (like in perfect competition) if firms respond to each other strategically then the model is not appropriate (maybe sometimes can still be good approximation). In cases there is strategic interaction you need either something like the oligopoly model that you will learn in economics class or more complex models that you will learn once you take Industrial Org class $\endgroup$
    – 1muflon1
    Oct 21, 2022 at 19:10
  • $\begingroup$ Also note there isnt a thing as a single 'fast food' market where every fast food firm competes... big chains could be viewed as competing on a market for fast food chains which I believe would be best described as an oligopolistic market. Even if there are no formal entry costs there are implicit entry cost as to have a chain you have to start with several restaurants not just one and thats not really easy. Then small fast foods compete on monopolistic market. $\endgroup$
    – 1muflon1
    Oct 21, 2022 at 19:13
  • $\begingroup$ Is this just language lawyering? Salop and monopolistic competition models have close to identical outcomes, and the prior has strategic interaction. $\endgroup$
    – Giskard
    Oct 21, 2022 at 22:24
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More than fast food chains, I think Walmart, Amazon, and on a slightly more niche basis, Home Depot are better examples of Monopolistic entities. Walmart, in the US, anyway, dominates brick and mortar retail sales, to the point that various sections of the store had entire stores dedicated to the sales of items in the past (i.e. music and movies) and those stores no longer exist in markets where Walmart is established.

Amazon is weird in that retail merchandise sales make up very little of their income, but take up a large part of their organizational structure. Most of the actual income at Amazon comes from the sales of server space, but still they are also ubiquitous and omnipresent in the online retail space with negligible competition.

In the classic economic model, monopolies manipulate price to maximize short term accounting profit, while foregoing economic profit, because accounting profit is much more tangible, and we can see this with the disaster that was the California Power Deregulation and Enron.

And, as can be expected in our economy, once things got out of control, some regulatory government agency investigates and files antitrust lawsuits, which break up the monopolies, or in the case of power, which is a natural Monopoly, reinstates the previous regulations and regulatory agencies to control the industry.

With this in mind, Walmart and Amazon have decided to act as if they are facing competition by keeping prices at a level consistent with heavy competition, and have decided to use their Monopolistic power to lower their cost of goods sold by manipulating the price of labor and goods sold.

This is much less noticable to the public at large, or to politicians and regulatory agencies and has allowed these companies to continue operating as obvious monopolies, unabated.

I don't know how this affects economic profit, but it's what I would concentrate on, as opposed to price manipulation, when studying the topic.

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