Friday, December 2, 2011
A Conspiracy of Hogs: The McRib as Arbitrage
Due 9 Dec 2011. Read the article and analyze the graph. Illustrate the meaning of arbitrage. What is a loss leader? Explain the economics concepts the author discusses in the article. Do you agree or disagree with the author's POV?
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According to the article, arbitrage is a risk-free way of making money by exploiting the difference between the price of a given good on two different markets—it’s the proverbial free lunch you were told doesn’t exist. In this case the two different markets would be the market for the pork and the market for the McRib. As we all know, business will only produce and market a new product if and only if they can make a profit out of it. The way McDonald's is making money out of the McRib is to take advantage of the difference prices at that time. By analyzing the graph provided, we can know that McDonald's reintroduced the McRib to the market in Octobers of 2005, 2006, 2007,and 2008. The pork price at these times were significantly lower.
ReplyDeleteA loss leader is a product sold at a low price to stimulate other profitable sales. The McRib would probably be the loss leader in order for people to buy the big drinks and fries along with their meal. In my opinion, McDonald's is doing the right thing because its purpose is to make money and I think arbitrage and loss leader are acceptable strategies for earning a profit.
The graph of pork prices in the United States shows that when pork prices fell significantly, the McRib was added back to the McDonald's menu. This price drop in pork occurred in October of 2005, 2006, 2007, and 2008. The article mentions that "arbitrage is a risk free way of making money by exploiting the difference between the price of a given good on two different markets." The two different markets regarding the McRib is the pork market and the fast food market. McDonald's analyzes the price drops in the pork market and sells the McRib only when it can make profit. Arbitrage is clearly occurring in this situation. A loss leader is when there is a product that is used only to attract customers and is "a limited-time-only product." This makes other options on the menu more appealing to go along with the loss leader. McDonald's whole approach in the food industry is to make both an economic and accounting profit. The McRib is an example of arbitrage that benefits the McDonald's corporation. McDonald's faces a competitive industry and needs to introduce new items such as the McRib to stay ahead of its competitors. In my opinion, the author is correct in his interpretation of McDonald's strategy. After analyzing the situation, McDonald's choice in its approach with its McRib sandwich clearly pays off.
ReplyDeleteI have always been against the fast food market. I got a great laugh out of this article! Arbitrage means, “a risk-free way of making money by exploiting the difference between the price of a given good on two different markets—it’s the proverbial free lunch you were told doesn’t exist.” The graph shows how at each decline of price for pork, McDonalds buys the pork and sells it as a McRib. The black lines are drawn in where the dramatic declines of prices are, where McDonalds buys the good. All companies want to make a profit and will do whatever is in their best interest to make the big bucks. For McDonalds, they bring the McRib to the market when pork prices are low. Since McDonalds has to keep the product around the same price each time they sell it in the restaurants, the company has to wait for pork sells to decline to buy the product to sell again. Each time McDonalds bought pork, the prices were almost at the bottom dio before prices went back up. A loss leader is a good or service advertised and sold at below cost price. A loss leader is a good or service advertised and sold at below cost price. Its purpose is to bring in customers in the retail store on the assumption that, once inside the store, the customers will be stimulated to buy full priced items as well. An employee of McDonalds basically admits the point of a loss leader is to lure in customers for them to hopefully buy full priced items. The Monopoly game on the drinks and fries is an example. The employee admits the customers are “on average, impulsive and easy to fool.” I believe that McDonalds is doing in their best benefit to make a profit. People should do their research to not be fooled and have more self control when buying fast food products.
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ReplyDeleteThe author of this article takes an interesting stance on the McRib and what seems to be a fast-food brand of arbitrage. Looking at it as a purely economic issue, McDonalds purchases a product, pork, on one market, then turns it around and BAM, sells it to us as a McRib for a comparatively exorbitant price. Arbitrage... Not really. I don't know that we could necessarily call this arbitrage. While it's rather interesting the McRib's return always happens on the declining end of the 'pork cycle,' I feel this more of just a result of good business decisions combined with great marketing techniques. Think about it -- McDonalds knows people will go crazy about the McRib whenever returns at any point in the year; McDonalds has the statistics, the numbers, and the claim to fame to know that. The McRib's seasonal returns is just a good marketing technique; people will want something they feel is a "limited-time offer" as they market a few of these seasonal returns 'A farewell tour.' Now, knowing this, it ONLY makes economic sense to have the McRib return when the cost of producing it is lowest. It's probably safe to say that the McRib wouldn't do so well if it were sold year-round, I mean it's a crappy pork sandwich sold at a high price. So, I feel the McRib, and its' seasonal returns are simply a result of good marketing and simple economic decisions that make sense in this capitalist society. I think this is a fine example of entrepreneurship and the nature of capitalism. After all, the McRib is worth whatever people are willing to pay for it; what it's worth to them, and McDonalds is just capitalizing on that. Call it what you want, what McDonalds does with the McRib only makes sense.
ReplyDeleteIn the graph it shows the price of pork and when McDonalds had brought back the McRib. This showed McDonalds purchasing pork when the price of pork had dropped (usually in the month of October). Arbitrage is defined in the article as "a risk-free way of making money by exploiting the difference between the price of a given good on two different markets—it’s the proverbial free lunch you were told doesn’t exist." It's comparing the price of pork of when McDonalds buys pork and the price of the McRib, when you compare the prices, it shows that McDonalds makes a profit from it.
ReplyDeleteA loss leader is when a product is "a limited time product" or other things around that line. The McRib would be considered a loss leader because its a "seasonal" item.
McDonalds is using both arbitrage and a loss leader to make money.
In my opinion, almost all businesses use those strategies to make profit. Since it is McDonalds intentions to make profit, its up to consumers to what they consume. They have the choice to either eat or don't eat fast food.
When analyzing the graph I realized that the price of pork fell greatly as the McDonald's McRib was reincorporated into the menu. The word arbitrage describes a risk free way of making money by exploiting the difference between the price of a given good on two different markets (according to the article). A loss leader is when a product is intended to attract cusomers for a limited time. This attracts more people and leads to major profits. The economic concept that is discussed is arbitrage. Pork and the McRib are the two markets and because one is down the other is up. This means that McDonald's intentionally serves the McRib when there is a frop in pork production. I agree with the author's point of view because McDonald's is quite sensible in it's strategies on what it serves. Having the McRib on the menu makes the most sense economically in order to ensure that they make profits.
ReplyDeleteArbitrage is defined as a risk-free way of making money by exploiting the difference between the price of a good on two different markets. In this case, the undervalued good is the hog meat in which McDonald's exploits the difference in the pork's cash price on the commodities market and the Quick Service market. The article suggests that the McRib is a perfect example of arbitrage, supporting their argument with a graph that shows the return of the McRib when pork prices are down. One theory that counteracts McDonald's arbitrage ways is to propose that the McRib is simply a loss leader. A loss leader is a limited-time only product that keeps the people hyped up about the product. The author seems to make a valid point regarding the arbitrage associated with the McRib, after all, McDonald's is involved in a competitive industry and so finds the need to be exploitive.
ReplyDeleteArbitrage is the opportunity to buy an asset at a lower price and then immediately sell it on a different market for a higher price. A loss leader is a product that is only offered for a certain time frame and therefore lures in buyers. The McRib is something that McDonalds offers only once a year, and when it's being sold for that short time, people want to buy as much of it as they can to get their "fix" of it. I agree with this article in that McDonalds is being very stratigic economically buy offering the McRib. McDonalds, like all other corporations, aims first and foremost to make a profit, which is what the McRib helps the business do.
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