Is McDonald’s A Monopoly?

While that theoretical framework might only exist between the pages of a well-thumbed academic textbook, it’s nevertheless essential for real-world business leaders to navigate their companies through the vagaries of a less-than-perfect commercial environment.

However, when the playing field is skewed unfairly in favor of a single or a small number enterprises, there are technical terms – which we will come to later – to describe how these organizations gain what many consider an unfair advantage.

In fact, one company that’s frequently maligned as profiting from these unearned privileges is fast food outlet McDonald’s.

Indeed, critics allege the restaurant acts as a monopoly, curtailing its rivals and leading to worse customer outcomes.

But is this true? Does McDonald’s engage in anti-competitive practices – or is it just a victim of its own success?

What Is A Pure Monopoly?

The term monopoly is one of those words that’s used liberally in everyday discourse.

However, it has a specific, technical meaning that isn’t always apposite on every occasion used.

For example, when properly invoked, a monopoly describes a market structure characterized by a severe lack of competition in which alternative products are not readily available to consumers.

Moreover, a company that is said to exist as a monopoly establishes itself as the dominant player in an industry, allowing it to snuff out its competition and have a high degree of control over the price point that it sells its goods or services.

Pure monopolies tend to be rare, but there have been some precedences of them springing up over the years. Microsoft was deemed a monopoly during the 1990s, while De Beers’ stranglehold on South African diamond production saw it wield monopoly-like powers worldwide.

While McDonald’s may fulfill some of the criteria required of a monopoly, it falls short on many others. That said, other types of market structures might better describe McDonald’s business, such as monopolistic competition and so-called natural monopolies.

McDonald’s Monopolistic Or Oligopolistic?

If McDonald’s isn’t a pure monopoly, what type of monopoly is it? Can it even be described as a monopoly at all?

To answer this, it helps to determine what kind of contest McDonald’s is up against in the fast food space itself.

For instance, market competition can sometimes be portrayed as either monopolistic or oligopolistic.

Monopolistic competition is a state of affairs in which many companies offer similar – but slightly different – products and services. Barriers to entry to this market structure are typically low, with the actions of one business unlikely to affect those of another.

Firms differentiate themselves in monopolistic competition through pricing and marketing strategies. However, because no one organization is in the ascendant, the price range open to customers cannot rise significantly above that of the actual costs of production.

On the other hand, if a market is distinguished by the presence of just a few larger businesses – all selling slightly more differentiated products – then this is known as oligopolistic competition.

In this system, each company enjoys a notable degree of power in its own right and is far freer to influence the price point at which it sells its wares. Oligopolies can give rise to cartels in which a small band of firms colludes to fix prices and production quotas.

In regard to McDonald’s, the Golden Arches is more likely to be engaged in monopolistic competition rather than oligopolistic. This is because the fast food chain offers similar products to other burger joints like Burger King and Wendy’s and is in a fierce battle with its peers on price and brand recognition.

Is McDonald’s A Natural Monopoly?

Interestingly, there’s another classification of monopoly known as a natural monopoly.

A natural monopoly is believed to arise when high costs of production favor just one large company operating within a given industry. In this way, a business can successfully exploit economies of scale and create an impenetrable barrier to entry to other potential competitors.

Although natural monopolies may hinder competition, they are often an efficient solution to inherent limitations that preclude multiple players from acting in a particular domain.

This is exemplified most succinctly in the utility sector, where it would be unreasonable to create parallel infrastructure projects for such massive undertakings as the electricity grid, sewer system, and water distribution network.

While McDonald’s doesn’t fit this mold perfectly, there are reasons to think it is more like a natural monopoly than a pure monopoly alone.

For example, McDonald’s is known for its unmatched level of consistency, with a finely tuned supply chain that enables it to serve customers in an affordable and highly efficient manner.

These synergies between McDonald’s departments make it extremely difficult for new market entrants to compete effectively. Add in its unimpeachable brand recognition and trusted reputation, and it’s easy to see why so many would view McDonald’s as a natural monopoly.

Is McDonald’s A Monopsony Or An Oligopsony?

A business doesn’t just become powerful by being the sole merchant in a particular marketplace. It can also achieve this by having superior purchasing power when it comes to sourcing new products and raw materials too.

Indeed, a monopsony is a kind of reversed monopoly in which one controlling player – the monopsonist – buys from a pool of multiple sellers. An oligopsony is similar, but with a smaller, limited number of buyers to the same high number of sellers.

Like monopolies, monopsonies engender imperfect market conditions. They offer monopsonists the opportunity to drive down wages while procuring discounted prices from wholesalers.

Even though McDonald’s is the largest fast food chain in the world, the company probably doesn’t see itself as operating in a monopsony or oligopsony capacity. It competes with a large selection of other buyers in the food market and is not as engaged in the fight against a minimum wage as it once was.

McDonald’s Vs. Burger King: Which Is The Better Stock?

Proving that McDonald’s isn’t a monopoly after all, the firm’s rivalry with Burger King pits the two businesses against each other in the stock market game as well as the court of public opinion.

However, while MCD is as close as you’ll get to a pure-play burger venture, Burger King is a subsidiary of Restaurant Brands International Inc., which runs a portfolio of other fast food brands such as Tim Hortons and Popeyes.

Not surprisingly, both outfits are huge revenue generators. McDonald’s and QSR each outpace their Consumer Discretionary rivals with annual cash from operations of $7.39 billion and $1.49 billion, respectively, and reported solid full-year financial performance in 2022.

Furthermore, MCD and Burger King are good options for income-oriented investors too. McDonald’s distribution has a lower yield at 2.15% compared to QSR’s 3.26%, but is offset by its 21 years of continued dividend growth.

Unfortunately, their payout ratios are high at 56% for MCD and 69% for Burger King. This suggests that the viability of this line of income might not be guaranteed, especially if either firm hits a roadblock somewhere along the line.

Conclusion: Is McDonald’s A Monopoly?

The nature of its high-profile brand recognition lends McDonald’s to the illusion that it’s an unassailable force in the fast food industry.

However, the company doesn’t tick enough boxes to conclude that this is the case. It has a plethora of rivals in the business, and the pressure to keep prices low means the enterprise doesn’t wield the sort of power many believe it does.