Question

The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profit increases. a. What will happen to the short-run profit of the sushi restaurant? What will happen to the number of sushi restaurants in town in the long run? Will the first sushi restaurant be able to sustain its short-run profit over the long run? Explain your answers. b. Local steakhouses suffer from the popularity of sushi and start incurring losses. What will happen to the number of steakhouses in town in the long run? Explain your answer.

Short answer

The sushi restaurant will likely see an increase in short-run profit but not be able to sustain it in the long run due to increased competition. The number of sushi restaurants will increase over time. Meanwhile, local steakhouses may decrease in number in the long run due to sustained losses.

Step-by-step solution

Analyze Short-run Profit for Sushi Restaurant

Initially, the sushi restaurant is likely to experience an increase in short-run profits due to the health report promoting the consumption of raw fish. This leads to higher demand for sushi, which increases the restaurant's sales and profit margin, assuming costs remain relatively unchanged.

Long-run Adjustment for Sushi Restaurants

As the sushi restaurant's profit margins increase, this signals new entrants that there is a profit opportunity in this market. Over the long run, the number of sushi restaurants in town is likely to increase as new competitors join the market to take advantage of the higher demand for sushi.

Sustainability of Short-run Profits

The first sushi restaurant may not be able to sustain its high short-run profits in the long run. With the entrance of new sushi restaurants, competition will increase, likely leading to a reduction in prices and profit margins for all sushi restaurants, including the first one, as the market moves toward a new equilibrium.

Impact on Local Steakhouses

Local steakhouses will likely see a continued decrease in demand as the popularity of sushi rises. These reduced sales may lead to sustained losses, which could force some steakhouses to close or adapt their business model in the long run.

Long-run Effect for Steakhouses

If the steakhouses continue to suffer losses and cannot adapt, the number of steakhouses may decrease over time. The market may reach a new long-run equilibrium where the number of steakhouses is lower than before, reflecting the change in consumer preferences towards sushi.

Key concepts

Short-run Profit

In the early stages of the sushi restaurant's launch, the anticipation of a novel cuisine in town, combined with the health report's endorsement of raw fish, is likely to lead to an upswing in consumer interest. This initial boom in business, characterized by increased consumer traffic and sales, typically translates into a surge in short-run profit for the pioneering establishment. During this phase, the restaurant's expenses are generally stable, allowing the more substantial revenue to boost profit margins significantly.

However, this windfall is not guaranteed to persist. In the short-term, the restaurant enjoys a form of monopoly due to being the only local provider of sushi. Yet, it's essential to understand that as profits soar, they serve as a beacon to potential competitors. This phenomena is a fundamental principle in market dynamics, where high profits are the signal for market entry that inevitably leads to changes in the market structure.

Long-run Market Entry

As the sushi restaurant's success becomes widely recognized, it not only retains a clientele drawn to the healthier dining option but also attracts the attention of prospective entrepreneurs and existing food service businesses. The lure of high profits in this niche market instigates a pivotal transition. Over time, the market observes an increase in the number of sushi restaurants as new players enter the space to capitalize on the demonstrated demand.

The process of long-run market entry is a self-regulating mechanism that dilutes the market share once exclusively held by the initial restaurant. This competitive environment continues to evolve until a state of equilibrium is achieved—where the profits are no longer supernormal but aligned with what is standard for the industry. The pivotal factor in this transition is the balance between customer demand and supply, moderated by the ease with which new restaurants can open and operate.

Consumer Preferences

The scenario with the sushi restaurant showcases the impactful role of consumer preferences in market dynamics. Initially, the townspeople's skepticism is overcome as a health trend shifts their preferences toward raw fish and away from large portions of grilled meat. Consumer preferences can be shaped by various factors, including health reports, social trends, or even a collective shift towards more exotic and diverse cuisines. Once established, these preferences drive demand, and ultimately determine the success of businesses that are poised to meet the new desires of consumers.

It's crucial for businesses to monitor and adapt to these changing preferences to stay relevant. The first sushi restaurant's sudden rise in profits is directly tied to these changing tastes, and any business looking to thrive must take note of such shifts and respond accordingly, whether through innovation, diversification, or by enhancing the customer experience to foster loyalty amidst a changing market landscape.

Competition Effects

The ripple effect initiated by the emergence of the sushi restaurant and consequent market entries serves as a textbook example of competition effects. As new establishments enter the market, consumers gain more options, leading to a more competitive environment. Each sushi restaurant must compete to attract and retain customers, often resulting in a price competition that can drive down prices to the benefit of consumers.

Competition leads to improvements in quality, service, and value, compelling all businesses to innovate and elevate their offerings. This can, however, lead to reduced profit margins for the restaurants. The original sushi restaurant may find it necessary to forgo some of its initial short-run profits to maintain its market position. For consumers, increased competition usually yields better choices and prices, while for businesses, it underscores the importance of continuously improving and adapting to maintain a competitive edge.

Sustainable Profitability

The pursuit of sustainable profitability is at the core of long-term business success. It involves navigating the competitive landscape and aligning business practices with consumer needs while ensuring financial health over the long run. For the sushi restaurant, maintaining profitability when the initial surge of popularity normalizes requires strategic planning and operation. It may need to establish a loyal customer base, enhance operational efficiency, adapt its menu to evolving preferences, and possibly diversify its services to create additional revenue streams, such as catering or cooking classes.

It's a delicate balance between gaining a competitive advantage and retaining it in the face of market saturation and evolving consumer tastes. The restaurant's initial short-run profit surge is not inherently sustainable without these efforts. Businesses must recognize that sustainable profitability is not a static target but a dynamic goal that demands continuous attention and agility in business strategy.