South-Western College Publishing - Economics  
Restaurants or Machines? The Viability of Vending Ventures
Subject Comparative Statics
Topic Monopolistic Competition
Key Words Sales, Brands, Brand Image
News Story

Canteen Vending Services now intends to offer national restaurant foods, such as Nathan's hot dogs, Red Baron pizzas, and Hardee's biscuits and burgers, in addition to its own sandwiches in its vending machines. The hope is that taste will be enhanced and consumers' opinions of vending machine food will improve. Regional tests showed that sales increased by 20 percent when the machines offered restaurant brands.

Restaurant chains such as White Castle see this development as a way for them to increase their customer base and encourage restaurant business. Refrigeration and minor modification to the products maintains product quality. Nevertheless, some restaurants, such as the main burger chains, refuse to enter the market because they fear inferior quality will damage their entire brand image and their restaurant business.

(Updated December 1, 1998)

1. Why does the food vending business approximate monopolistic competition? Refer to the assumptions underlying this type of market structure.
2. Canteen's strategy is one of further differentiating its product.
  a) How will this affect the demand curve for its vending machine food? Cite two ways.
  b) In a diagram with axes representing costs and prices on the one hand and output on the other, draw the average total and marginal cost curves, and the demand and the marginal revenue curves for Canteen. Show the initial equilibrium price, output and profit. Using a different colored pen, show what happens to price, output and profit as a result of (a).
3. Some doubt whether quality can be assured.
  a) Draw a diagram of the equilibrium position of a monopolistically competitive restaurant, such as White Castle. Using a different color, show what happens to price, output, and profit if consumers desert the restaurant because they perceive a quality problem after eating White Castle burgers from a vending machine.
  b) If White Castle made a loss in the long run, what would happen?

Source Associated Press, "Machine cuisine gets name brand cache", St. Petersburg Times, October 23, 1998.

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