Why Fast-food Industry Is Recession-proof?
Date:
INFORMS
Business cycles are a primary driver behind firm’s expansion and contraction decisions. However, there is inherent uncertainty about the state of business cycle because observed economic fundamentals are only imperfect indicators of the underlying economic condition.
In this presentation, I showcase an equilibrium model and an estimation methodology of firm’s strategic expansion/contraction policies to examine the growth robustness of an industry (or a firm) with respect to unfolding business cycle. In the model, firms make strategic expansion/contraction decisions based on a belief distribution about the underlying partially observable state of business cycle. The belief is updated when new economic data becomes available.
The modeling and estimation methodology is tested on a dataset of Canada’s fast-food industry with information on entry/exit decisions from several fast-food chains, demand shifters, and fundamental economic indicators.
Our estimation results provide a justification for many market observations that the Canadian fast-food industry is recession-proof, as its estimated marginal profitability is largely immune to economic downturns. Moreover, the estimate for the dominant firm’s base profit exceeds its rivals’ counterparts in every state of the business cycle, consistent with observed increasing growth rate for the dominant firm.
Counterfactual simulations are conducted to analyze how business cycles affect market structure: A growth-oriented firm if not recession-resistant may not maintain a steadily growing market share, which can significantly shrink during prolonged recessions. Interestingly, a more volatile economy dampens investment even with risk-neutral firms, resulting in less expansions than a less volatile one.