Case study: Ch5. Perfect Competition Harvard Case Solution & Analysis

Case study: Ch5. Perfect Competition Case Study Analysis


The case is about Patty's Patties, a well-established brand recognized for its top-tier frozen hamburger patties, widely distributed in retail establishments nationwide, struggling with susceptibility to an array of external factors capable of having considerable influence over consumer conduct and, consequently, the bottom line.

In this comprehensive report, we explore the strategies Patty's Patties should employ when confronted with specific market dynamics, both in the brief proximity and the extensive landscape, while precisely analyzing their effects on profitability.

Situational Analysis

Short Run vs. Long Run Adjustments

Before we explore the specific market developments, it's essential to understand the difference between short-run and long-run adjustments in economics. In the short run, a company like Patty's Patties can make quick, temporary changes to its production and pricing strategies. In contrast, the long run involves more comprehensive adjustments aimed at achieving sustainable profitability.

Market Development 1: Health Benefits of Vegetarianism

 Elasticity of Demand and Consumer Behavior

One of the significant developments impacting Patty’s Patties is the rise in awareness about the health benefits of vegetarian and vegan diets, resulting in a 20% permanent reduction in hamburger patty consumption.

The Price Elasticity Equation

To analyze this phenomenon, we can utilize the price elasticity of demand equation.

This equation helps us understand how responsive consumers are to price changes (Andreyeva, 2010). In this case, the reduced consumption could be attributed to the higher price elasticity of demand for hamburger patties. Patty’s Patties may observe a significant drop in sales due to the increased price sensitivity.

Short-Run Response

Patty’s Patties must swiftly adapt in the short run to minimize losses. We will use the Price Adjustment Equation for this purpose.

By adjusting prices, Patty’s Patties can attempt to balance the drop in demand with pricing strategies. In conclusion, Patty’s Patties should consider lowering prices temporarily, as a lower price may mitigate the impact of reduced demand.

Long-Run Sustainability

In the long run, it becomes inevitable for the organization to methodically safeguard its continuing success. The long run could respond in the proposition of profit optimization, wherein the margin revenue (MR) is equivalent to the margin cost (MC). Firms maximise profit in a perfectly competitive market by producing where MR equals MC.

In short, to maximize profits, Patty’s Patties should produce where marginal revenue equals marginal cost. To maintain profitability in the long run, Patty’s Patties may consider diversifying its product line to include vegetarian or vegan options, aligning with changing consumer preferences. This strategy aims to capture a broader market share and adapt to evolving consumer choices.

Market Development 2: Imposed Tax on High Cholesterol Products

Tax Incidence and Impact Equation

The tax incidence equation helps us understand how the tax burden is distributed between consumers and producers (Saez, 2019). In a perfectly competitive market, firms may attempt to pass on some of the tax to consumers.

​Analyzing this equation allows Patty’s Patties to assess how much of the tax they can pass on to consumers.

Short-Run Response

Immediate strategies are crucial in the short run. In the short run, Patty’s Patties may choose to absorb a portion of the tax, adjusting the price paid by consumers to minimize the impact on demand. This strategy helps maintain customer loyalty while dealing with immediate tax-related challenges. Patty’s Patties may choose to absorb a portion of the tax to retain customer loyalty. The Absorption of Tax Equation will be helpful in this case.

Long-Run Adaptation

In the long run, the company must reevaluate its products and strategies. Patty’s Patties can utilize economic theories like the Theory of Consumer Choice to identify how consumer preferences for healthier options can shape their product innovation. The Theory of Consumer Choice explores how consumers make decisions based on preferences and budget constraints.

Patty’s Patties can utilize this theory to understand how consumer preferences for healthier options may impact their product innovation. In the long run, Patty’s Patties can invest in research and development to create healthier burger options with reduced cholesterol levels. This strategy aligns with changing consumer preferences and may help them avoid the imposed tax..............

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