Competitors and competition

Characteristics

Current situation

Future trend

Market concentration (number of firms, concentration ratios, HHI)

According to experts, the market concentration in this industry is relatively high due to its nature of high-class. There are approximately 12 premier restaurants in Saint-Petersburg and the concentration ratio for the top four is over 50% which means a fairly high concentration.^2,3

Thanks to the word of mouth many potential customers tend to visit restaurants recommended by their friends and, more often than not, people tend to stick with the restaurants of their choice, i.e. they are reluctant to switch because of their personal preferences. Hence, the industry concentration will remain high in the future. However, the key players may change over time.

Market growth

Because the overall population of premier restaurants is small then the relative growth rate is fairly high – 10% to 16% per year. But, over time, since the absolute growth is pretty constant – about a new restaurant yearly, then in the future, the relative growth rate will decrease, unless there would be more newcomers to the market. Another crucial point is that the growth is very limited by the deficit of qualified personnel – administrators, chief cooks etc.⁴

As the general economic situation in Saint-Petersburg improves and more entrepreneurs spot opportunities in this industry, we can expect the growth to be faster than today. Also, the current barrier for growth – deficit of qualified personnel is likely to be overcome by importing the people from abroad and by training them in Russia.

Cost differences (among firms)

It all depends on the structure of the menu, for example, some restaurants have more high-price products on their menu, and other keep more affordable stuffs on their menu. But, generally, the average check sum is about 3500 – 4000 rubles per person.

The situation is unlikely to change in the short-run, since each restaurant operates in accordance with its price strategy. But we cannot be sure whether the cost differences would remain small in the long-run because there could be some industry changes that would force the players to adjust their prices to be dramatically different – some natural cataclysms that limit the supply of primary materials etc.

Product differentiation

The product is very highly differentiated with each player offering its own unmimicable products – national cuisines, exotic cuisines etc. Otherwise the entire concept of the industry of premier restaurants will be compromised – it is all about high class and individuality.⁵

The same situation will likely to remain in the future.

Price differences

Prices for flagman products would be very different because they represent the restaurant as a business – they are the crown jewel of these enterprises, hence they shall be differentiated not only by their unique characteristics but also by such an attribute as price. But for general food stuffs – beverages and garnishes (potato, pasta etc.) the price is less differentiated.

The same situation will likely to remain in the future.

Excess capacity

Since we consider the type of completion as monopolistic competition, then all the restaurants are operating not at the optimal capacity level, i.e. they operate with excess capacities.⁶

Because it is more profitable to produce less and sell at higher prices than to cut prices and sell more quantities, then the restaurants would prefer to stay with excess capacities.

Are prices and terms of trade transaction observable?

The prices and terms of transaction are observable only if the consumed products are stated in the menu. If the clients would prefer special products or services (exotic dishes, special treatment – banquets, buffets etc.) then the terms of transaction would be unobservable.

The future situation depends heavily on the preferences of individual restaurants – some of them probably would prefer to make all their prices and terms of transaction observable. But for the most players it is much more preferable to negotiate with the special requests individually, since this allows them to extract all the consumer surpluses.

Can firm adjust prices quickly?

Because eating at the premier restaurants is not only about enjoying wonderful foods and services but also about prestige and self-esteem, then it would be considered to be a negative move by the consumers if the restaurants decide to cut prices. But it would be easier to increase prices because the elasticity is low but the restaurants shall keep in mind that if they increase their prices in big unreasonable leaps then they run a high risk of losing even their most loyal customers.

In the long run the prices would rise but these changes would be rather gradual in nature.

Type of competition (price, quantity, simultaneous, sequential)

Since the products offered by the premier restaurants are really not in big quantities then it is more reasonable for them to compete on prices. But even there would be peculiarities caused by the specifics of the industry – there would be no price wars for sure, but the restaurants could offer special prices for the most coveted rich customers etc. The game is a sequential one because generally it is more or less easy to obtain information on the prices of the competing restaurants, but the game also could be simultaneous because there are also many unobservable prices and terms of contracts.

The same situation is likely to remain in the future. Unless a law will be established that will make it a compulsory term for restaurants to disclose all the prices and terms of transaction including those which are privately negotiated.

Leadership pricing?

Because the products are really differentiated and the restaurants prize themselves for being individually attractive then leadership pricing is unlikely.

The same situation is likely to remain in the future.

Tacit collusion(actual and potential)

The tacit collusion is more in a potential form than in an actual form. This is because at the moment we do not see any collusions among the premier restaurants – they do not negotiate on how many products they would produce or how many customers they would serve (because their products are just too differentiated). The price is also hard to negotiate since the products are too heterogeneous.

It is really hard to predict the future situation on tacit collusion, but there is a potential threat – which is the restaurants would collectively rise prices for a certain amount of time and then stop and stick with it. This would help them to achieve two goals – putting higher prices and earning more profit and keeping their customers without any risk of losing them to the competitors.

Antitrust litigations

This is a very unlikely situation since there is just no point for the premier restaurants to form trusts because they offer products which are way too heterogeneous.

Unless the consumer tastes change so much that the restaurants would serve them with plain white bread and water the situation will remain the same as in the present.