February 9th, 2010 by Joern Meissner
Franchises have long held the power when it comes to pricing, but after a ruling in 2008 that opened the door for more pricing mandates by corporations, Burger King and several other companies have decided that pricing is their concern and should be under their control.
The current argument between Burger King and its franchise chains is the price of a double cheeseburger (strangely, the same menu item that caused McDonald’s and its franchises issues in 2008). Burger King says that the double cheeseburger should be no more than a dollar, which allows it to be placed on the already corporate-mandated and corporate-priced Value Menu.
Franchise holders say that the move not only cuts into their profits but also into their control, as they previously had exclusive rights to price management. Michael Seid, a franchise consultant, said (Burger King Franchisees Can’t Have It Their Way, Wall Street Journal, January 21st, 2010),
When you’re talking about changing something as key to a business as what do I charge for my goods, that becomes an issue.
The case highlights the problem faced in transparent markets, namely that a single price must be found. This is caused either through the Internet and price comparison engines or necessitated by a nationwide advertising for a special offer.
Fast food restaurants are just one market among many facing these issues. While the airline industry has networking effects to consider, this is somewhat similar to the situation Arne Strauss and I analyzed the paper ‘Pricing Structure Optimization in mixed restricted/unrestricted Fare Environments’. Having a single price that is available for all customers will result with a high likelihood in some members of customer segments paying less for products they would pay more for. The Burger King case highlights the difficulties managers face when setting prices that have open availability and are without any fences in different locations and markets.