1. When McDonald’s Corp. reduced the price of its Big Mac by 75 percent if customers also purchased french fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn’t. Within two weeks sales had fallen. Using your knowledge of game theory, what do you think disrupted McDonald’s plans?
The disruption of McDonald's plans could be explained using game theory and the concept of strategic interaction between competitors. In this case, customers had the option to purchase a Big Mac at a reduced price if they also bought french fries and a soft drink.
However, there are a few potential factors that could have undermined McDonald's strategy and contributed to the decline in sales:
1. Substitution effect: Customers may have been willing to purchase the Big Mac at the reduced price, but they may have decided to forgo the additional purchases of french fries and a soft drink. This would reduce the overall revenue gained from the promotion and potentially lead to lower profits for McDonald's.
2. Cross-price elasticity: The promotion's success would depend on the assumption that the price reduction on the Big Mac would drive enough additional sales of french fries and soft drinks to compensate for the lower individual item price. If the cross-price elasticity of these products is low, meaning that changes in the price of one product have little impact on the demand for the other, the promotion may not have been as effective as anticipated, resulting in lower overall sales.
3. Competitor response: McDonald's competitors, such as other fast-food chains, may have responded strategically to the promotion. These competitors might have implemented countermeasures to maintain their own sales, potentially offering similar promotions or adjusting their pricing strategies. This could have diverted customers away from McDonald's and contributed to the decline in sales.
In summary, factors such as the substitution effect, cross-price elasticity, and competitor response could have disrupted McDonald's plans and led to the decline in sales after the implementation of the promotion.
To analyze what might have disrupted McDonald's plans, we can consider this situation through the lens of game theory. Game theory studies decision-making in situations where the outcome depends on the actions of multiple actors.
In this case, we can identify two actors: McDonald's and its customers. McDonald's introduced a novel promotion where customers could get a 75 percent discount on a Big Mac if they purchased french fries and a soft drink. By doing so, McDonald's aimed to increase sales and revive its U.S. sales growth.
One way to approach this situation using game theory is to consider the customer's decision-making process. Customers have two options: to take advantage of the promotion or not. Let's assume the possible outcomes for McDonald's and the customers are as follows:
1. If customers take advantage of the promotion, McDonald's would benefit from increased sales.
2. If customers do not take advantage of the promotion, McDonald's sales would not be affected.
Now, let's analyze the potential reasoning behind the customers' decision-making:
1. If customers believe that the discount is beneficial and the overall cost of purchasing the entire meal with the promotion is lower than buying only a Big Mac, they might be inclined to take advantage of the offer.
2. However, if customers perceive that the additional cost of buying french fries and a soft drink outweighs the discount on the Big Mac, they might choose not to take part in the promotion.
Given the sales drop within two weeks, it suggests that the customers decided not to take advantage of the promotion. Possible contributing factors could include:
1. Customers might have already considered the overall cost and realized that the discounted price was not as attractive as initially perceived. They might have preferred buying only a Big Mac at its regular price.
2. The additional items (french fries and a soft drink) might not have been appealing to customers or aligned with their preferences. If these items were not of high quality or value, customers might have opted out of the promotion.
3. The logistics of purchasing three items (Big Mac, fries, and a drink) instead of just a Big Mac could have been inconvenient for customers, leading them to choose the simpler option.
In game theory terms, the customers' decision not to take advantage of the promotion can be seen as a deviation from the expected outcome. This deviation disrupted McDonald's plans, as they anticipated increased sales but experienced a decline instead.
Overall, while game theory can provide insights into the decision-making process surrounding promotions and sales strategies, it is essential to consider other factors like customer preferences, perceptions, and logistical elements to fully understand what might have disrupted McDonald's plans in this specific case.
Evidently customers didn't want fries and a soft drink.
http://www.econlib.org/library/Enc/GameTheory.html
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