Why McDonald’s Has Pricing Power

Last February, Wendy’s told us that its digital menu boards would change during the day.

Assuming burger prices would rise when demand increased, customers protested.

“No,” said Wendy’s CEO. Their menu board let them lower prices.

But there is much more to the story.

McDonald’s Prices

Like Wendy’s, McDonald’s has digital menu boards:

Handy for enticing diners, the digital boards display promotions. Showing different prices at different times and days, they also introduce new products. Indeed, for all new information, whether its a burger or a drink, a discount or a price hike, the digital board can say it all. And, in that way, researchers concluded that they diminish wait time by making ordering easier.

Also though, they are one way that McDonald’s optimizes pricing.

Rather like an airline fare, one person could pay $14 for a burger and fries while a friend uses her app to spend $3.99 for the same order. McDonald’s regulars know that the app, with its discounts and promotions and loyalty points, could save them big bucks.

But not necessarily.

Once they’ve lured you to the app, McDonald’s gets to know you. From your app’s data, they can even figure out your payday. Consequently, when you have more cash in your wallet, prices rise and discounts diminish.

In a Bloomberg podcast, analysts place McDonald’s pricing strategies in a retail history timeline. They explain that, in London, during the early 19th century, store clerks haggled with customers. Time consuming, the process meant every customer could have a different price.

But then we had the invention of the 19th century department store. Think New York’s Macy’s. It would have been impossible and impractical to train hundreds of employees to negotiate a price for thousands of items. The result? By 1890, one price for each item had become the norm.

With single prices, customer service could blossom as would customer loyalty. We could also have price wars, money-back guarantees, loss leaders, and promotional pricing, Auto dealers tell us that fixed prices for cars cuts buying time by 82 percent from more than four hours to 45 minutes.

Now though, sort of back to where we started, we again have different prices for the same item…even hamburgers.

Our Bottom Line: Pricing Power

Online, we have airlines and Amazon raising and lowering prices. In supermarkets we have Electronic Shelf Labels that can charge each of us a different price for our Cheerios.

In traditional economic texts, we say that pricing power increases as we move to the right along a competitive market structures continuum. Moving from perfect competition to monopolistic competition, to oligopoly and monopoly, we have increasingly powerful firms. Theoretically, the ones that are more powerful have more control over what they charge instead of the market’s supply and demand.

As always, it is not quite that simple. Whereas traditional textbooks teach us supply and demand graphs, they should add the pricing power that apps and digital menus give them. Depending perhaps on AI, an equilibrium price could perpetually shift in every market structure.

As a result, asking about prices, our answers are increasingly messy.

My sources and more: Thanks to Bloomberg’s Odd Lots podcast for inspiring today’s post. From there, this website had more on McDonald’s digital boards.

Please note that several of today’s sentences were in a past econlife post.