For my essay, I have chosen to investigate “Which market structure best describes the Cha Chaan Teng Market in Wellington Street, Hong Kong?” Cha Chaan Tengs are commonly found in Hong Kong. They are known for eclectic and affordable menus, which include dishes from Hong Kong cuisine and Hong Kong-style Western cuisine. They can be characterized by their quick service and cheap products and have become an important part of the daily lives of the locals in Hong Kong since the 1950’s. Wellington Street is a one-way street located between Central and Sheung Wan. The street is 600m long in total. Not only are there many office building in the area, there are also many nightclubs and bars along Wellington Street and beyond. The street holds many restaurants of other cuisines as well.Along Wellington street there are 20 restaurants. 5 out of the 20 restaurants are Cha Chaan Tengs. They are marked with the blue pins on the map above. Tsui Wah is an example of a wide-chain Cha Chaan Teng, with 21 branches across Hong Kong and over 26 branches in Hong Kong, Macau and Mainland China. The most famous branch being in Wellington Street, Central. The other Cha Chaan Tengs include, Mak’s Noodle, Chopsticks Kee, Tsim Tsai Kee and Wah Fung. Unlike Tsui Wah, these are small independent firms. I hope to analyse what kind of market structure this resembles in my essay.Street NumberRestaurant15-19Tsui Wah77Mak’s Noodles85-89Chopsticks Kee98Tsim Tsai Kee112-114Wah Fung (????)1.1 HypothesisWith the basic observations of the market, I hypothesize that the market structure of the Cha Chaan Teng industry will closely resemble a monopolistic competition market (A market made up by a fairly large number of small firms that produce slightly differentiated products). The barriers to entry would be low as it requires a low set-up cost, however there will be some degree of brand loyalty. 1.2 MethodologyA monopolistically competitive market would have the following characteristics:Barriers to entry existAdvertising Brand loyaltyHigh number of firmsEach firm would have a low market shareProducts are sold at similar prices due to elastic PEDProduct differentiation High level of marketing, including customer serviceThe low set-up cost means firms are able to earn abnormal profits in the short-run. However as more firms enter the industry due to earning abnormal profit, the abnormal profit will be competed away until only normal profit is being made. This concept can be illustrated with the following diagrams: For primary research, Wellington Street will be used specifically to be investigated. Research will be conducted through observations, interviews and questionnaires. The 5 Cha Chaan Tengs will be used for investigation. Prices of 3 products will also be recorded from each Cha Chaan Teng to investigate the price differentiation and the XPED of products. Questionnaires will also be conducted. 50 customers will be randomly chosen to be surveyed. The aim of the questionnaires are to investigate the customer’s’ reason of choosing a particular Cha Chaan Teng to dine in, and their behaviour when dining in the Cha Chaan Teng, which will present data regarding brand loyalty. An interview is also conducted with the CEO of Tsui Wah Holdings Ltd., Mr Peter Pang (see Appendix A). The aim of the interview is to find out about the operations of a Cha Chaan Teng, barriers to entry/exit in the industry and both the non-price competition within the industry. For secondary research, different resources will be used to help identify the market structure. These are listed below:Books and publicationsArticles and studies about the industryAdvertisements of Cha Chaan TengsLiterature review of the market structuresThese will be used to back up some of the data found from the primary datas and to assess how easy it is to set up a company and if the entry to the market is easy.2. Investigation2.1 Entry to MarketThe openness of the industry for Cha Chaan Teng in Wellington Street can be examined using the following aspects.Firstly, the rent for shops from the area can be used to help determine the cost needed to set up a firm in the area. The expenses on marketing campaigns and equipments can also be investigated to help determine the cost of setting up a Cha Chaan Teng. Sunk CostSunk costs are costs that cannot be recovered if a firm decides to leave an industry. This would include money spent on advertising, marketing and research and develop projects; and capital inputs specific to the industry, which have little or no resale value. Marketing and Advertising — Marketing and advertising campaigns although are not used by most of the restaurants, they are mostly utilised by bigger chain firms. The most popular method of advertising is television adverts and posters. Equipments — The equipments required will mostly be kitchen equipments, such as a coffee machine, frying machine etc. Most Cha Chaan Tengs will also have one to two TVs that are subscribed to a cable TV channel. The cost of equipments are not high individually. Rent — The cost of rent in the area is significantly lower. The monthly rent for a street shop of 1500ft2 is HKD $260,000, which is $173 per feet, equating to £18 GBP roughly. The property considered is located at: 108-110 Wellington Street, Central, Hong Kong. Contrastingly, although Causeway Bay is also a popular area, the cost of rent for a street shop is significantly higher. The rent of a street shop of 1600 ft2 is $400,000, $250 per feet, (approximately £25.1 GBP)Licensing — Restaurants in Hong Kong are required to apply for a General Restaurant license. The fee for a General Restaurant license for one year depends on the size of the the general restaurant by reference to the floor area. A General Restaurant License is non-transferable unless with the consent the Licensing Authority. As some Cha Chaan Tengs also serve alcohol, they will be required to apply for a Liquor License. The fee for a liquor license that is valid for one year is $3940 HKD, which would convert to around £394. The fee to transfer a liquor license is $140 HKD, which only consists of a small percentage of the full license, hence there is little resale value of the licenses. As we can see from the data above, the sunk cost is fairly low in the business. This is because advertising campaigns are not popular and required in the industry to compete. The cost of equipments is not high and the cost of rent is fairly low in comparison to other areas in Hong Kong. 2.2 Barriers to entryBarriers to entry are ‘the existence of high startup costs or other obstacles designed to block potential entrants from entering a market profitably’. Barriers to entry seek to protect the power of existing firms and maintain supernormal profits and increase producer surplus. Common barriers to entry include special tax benefits to existing firms, patents, strong brand identity or customer loyalty.The requirements for entry into the Cha Chaan Teng market include, ‘relatively low capital requirements and levels of operational skill needed to establish a business’, these are all relatively low in cost, enabling initial small-scale entry with the potential for expansion over time. A number of small-scale local Cha Chaan Tengs are evident in the market and have traditionally been family-owned and operated.2.2.1 AdvertisingFrom Tsui Wah’s 2016 annual company report, we can see that the expense spent on property rentals and related expenses were HK$311,541,000, which was the third highest cost for the firm, accounting for around 17.16% of the cost for the firm. The expense spent on this also increased from HK$278,473,000 in 2015, by 11.87%. In 2015, Tsui Wah spent a total of HK$8,929,000 on advertising and marketing and in 2016, their spending on advertising and marketing increased to HK$14,198,000, which is an increase of 59%. However, not many firms in the area advertise as most of their customers are returning local customers, as suggested by the customer survey in Appendix B. In order to advertise, Mr Pang has expressed that they “invest both in ATL and BTL segment” ATL stands for ‘Above the Line Marketing’, whereas BTL Marketing stands for ‘Below the Line Marketing’. This kind of marketing targets specific groups of people with focus, for example leaflet drop in a specific area. However, these strategies of advertising is also adapted by other firms in the market. Yet, Tsui Wah is the only Cha Chaan Teng in Wellington Street that has an advertising campaign. In 2015, Tsui Wah designed an animation character based on one of their dishes, the “Crispy Bun with Condensed Bun”, and use it as their endorser, and made a series of poster that were stuck outside their restaurants, in Hong Kong MTR stations and on the trams. 2.2.2 Brand Loyalty50 customers were surveyed in Tsui Wah. 7 questions are designed to determine the habits of the customers and the possible cross price elasticity (XPED) (The responsiveness of demand for good A to the change in price of related good B) between different firms in the area. In the survey, local customers answered question 1, 3-7, whereas tourists answered question 1, 2 and 7. The survey was conducted during the afternoon on a weekday. During the survey, it could be observed that most of the customers were middle ages and some were working in the offices surrounding the area. There were also a few students in the restaurant at the time. Below are graphs of results that were obtained from the survey:It shows that most of the customers in Tsui Wah are locals, as it consists of 85.2% of the people they were surveyed. This question was only answered by tourists. As nearly half of the customers knew about Tsui Wah through social media, this shows that their advertisement campaign may not be the most effective in terms of increasing the number of new customers.As 78.6% of the customers live or work in the area, this suggests that the main source of local customers are from the offices nearby or that they live nearby the area. 90.5% of the customers do not visit other Cha Chaan Tengs. This suggests customer are loyal to the Cha Chaan Teng that they choose. 92.9% of the customers visit Tsui Wah at least once a week. This suggests that customer loyalty do exist to some extent, giving restaurants the ability to be price makers. 76.2% of the customers choose to switch another Cha Chaan Teng if the other Cha Chaan Teng decreases its price 20% and above. 52% of customers chose location as the most important factor, which is why a lot of the customers who work in the Central area would choose to dine in a restaurant on Wellington Street. Followed by brand reputation. This suggests that customers tend to go to restaurants closest to them and also decide base on the restaurant’s reputation.None of the customers consider the advertising campaign as a deciding factor, suggesting that advertising campaigns are not effective in this industry. 2 customer found facilities the most important when choosing a Cha Chaan Teng and 16% of customers chose the price of products as another important factor This suggests that customers do not mind the interior of the restaurant as long as the quality of the food is good and reasonably priced and has a good reputation. From the survey, we can conclude that 90.5% of customers only dine at Tsui Wah. 92.9% of these customers visit Tsui Wah at least once a week. This suggests a high degree of customer loyalty. Since they are loyal to the Cha Chaan Teng they visit, most of them do not switch restaurants easily. 85.2% of customers in this branch of Tsui Wah are local customers Tourists only taking up a small percentage of the total customers. 76.2% of customers are willing to switch to another Cha Chaan Teng if the other shop decides to reduce their pricing by 10-20%. 10-20% although may seem like a high percentage, as the prices for products in Cha Chaan Tengs are fairly cheap, the change in prices will only be very small to customers. This suggests a relatively elastic XPED. Cheaper products in other Cha Chaan Tengs are close substitutes of each other. This is supported as Mr Pang has said in the interview, every time they adjust the pricing on their menu, there may be an impact for the first few months. The findings suggest that in order for firms to gain a larger market share, they would need to sell reasonably priced food and have a good reputation. This will allow them to gain customer loyalty in the long run. This also implies that non-price competition plays a large-role in the industry. This is an important feature of an oligopoly and monopolistic competition. From the interview, it is suggested that the proportion of returning customers is quite big, and most of the customers in the branch in Wellington Street being a mixture between locals and tourists from overseas and Mainland China. However, customers do react to the price changes quickly, as Mr Pang mentioned that every time Tsui Wah has a price adjustment, there may be some impact in the first few months, indicating that Tsui Wah has an elastic PED (price elasticity of demand) because in a market of monopolistic competition, there are many close substitutes for the good. 2.2.3 Number of firmsWithin the street, there are 20 restaurants on the street. 5 of them are Cha Chaan Tengs, which accounts for 25% of the restaurants. The number of firms are fairly large compared to restaurants of other cuisines. 2.3 Market ShareThe competition within the market, not only Wellington Street, is very big, as there are about 7000 Cha Chaan Tengs in Hong Kong and it takes up 25% of the number of restaurants on Wellington Street, suggesting that each firm would only be able to obtain a small market share. The number of firms that exist in the whole market is extremely high. As Mr Pang mentioned in the interview, more than 7,000 Cha Chaan Tengs exist in the market, this means that each firm would only be able to have a small concentration of market share. Frost and Sullivan has compiled data of the top ten chain Cha Chaan Tengs in the industry in Hong Kong. The table is ranked in terms of revenue as of December 2011.As we can see from the table, even though Tsui Wah is able to earn a high revenue of $722 million and is the biggest chain Cha Chaan Teng in Hong Kong, the market share they possess is only 3.2%. However, it is ranked as the top chain Cha Chaan Teng in terms of revenue. As we can also see from the table, the chain Cha Chaan Tengs with revenues below Tsui Wah, have an even smaller market share, mostly consisting of 0.2%. This means that local independent Cha Chaan Tengs would have an even smaller market share. Firms having a small market share is a feature of monopolistic competition and perfect competition, where individual firms are small relative to the market size. 2.4 Price CompetitionThe prices of different products demonstrate similarity of price in different restaurants. In a monopolistically competitive market, each firm sells a unique product, hence they can decide themselves the price, however, the difference would not be too big as the products should be price elastic. The prices of the same product from 5 different restaurants are considered. Data is plotted as bar charts. The x-axis of the chart is the selected restaurants and the y-axis is the price of the product. Below are the results measured in HKD, 10 HKD roughly equals to 1 GBP:The price of iced coke varies among restaurants. The highest price for Iced Coke being $24 from Tsui Wah, and the lowest being $9 from Tsim Tsai Kee. There is a 24% difference between the highest and the lowest priced.The prices of Wonton noodles also varies according to restaurant. Mak’s Noodles sell wonton noodles at the highest price of $40 compared to other restaurants, whereas Tsim Tsai Kee sells it at the lowest price of $29. There is a 27.5% difference between the highest and the lowest priced. Due to product differentiation, different restaurants specialize in different dishes, hence some may not sell Wonton Noodles.The prices of a noodle set varies among the restaurants. A noodle set will typically consist of a noodle dish with 2 toppings in soup and also a complimentary hot drink The highest price is $56 from Tsui Wah, whereas the lowest is Chopstick Kee, $32. However, they can be separated into two groups one of higher price and one of lower. There is a 43% difference between the highest and lowest priced.It is evident that most products are priced differently between restaurants. This is because of the difference in ingredients used for the products. This can be supported by Mr Pang, who said that the prices that customers are paying for are “reasonable’. Furthermore, the sizes of the dishes do vary between different restaurants. This is evidence of price differentiation, a characteristic of monopolistic competition, suggesting that the market could be monopolistically competitive.2.5 Non-price competitionNon-price competition is a marketing strategy “involving advertising and marketing strategies to increase consumer demand and develop brand loyalty.”. Firms can distinguish their products through the quality of service, customer service and advertising campaigns. Firms engage in non-price competition in order to develop brand loyalty and to make demand for their products less elastic. 2.5.1 Product differentiationThe products sold in the Cha Chaan Tengs include a wide range of similar dishes and drinks, such as milk tea, French Toast, sandwiches and fried rice and noodle dishes. Different Cha Chaan Tengs offer various set meals for customers throughout the day for breakfast, lunch and dinner. These include, “Nutritious set”, “Special set”, “Fast set” etc. Therefore, the products are slightly differentiated. Milk tea is a very common product sold in Cha Chaan Tengs, it is sold in every Cha Chaan Teng mentioned above. In Tsui Wah, they have released a variation of this, the “Milk Tea Champagne”, in order to differentiate their product. Another product that is very well-known in Tsui Wah is the “Crispy Bun with Condensed Milk”, which is only sold at Tsui Wah only. We can also conclude from the survey that Cha Chaan Tengs can generally be separated into two types, ones specializing in noodle dishes and ones specialising in other types of food. Mak’s Noodles and Tsim Tsai Kee specialise in noodle dishes as they do not sell French Toast; whereas Wah Fung and Chopsticks Kee specialise in other dishes, as they do not sell wonton noodles. On the other hand, Tsui Wah sells both types of products. This is evidence of product differentiation, which is a characteristic of monopolistic competition and oligopoly. 2.5.2 ServicesThe service in a Cha Chaan Teng are efficient and quick as customers who visit Cha Chaan Tengs mostly look for a quick and cheap meal that is filling. There are also customers who visit Cha Chaan Tengs for entertainment, for example watching football on TV or meeting up with some friends. Cha Chaan Tengs are restaurants with minimal service and unconcerned with a high turnover rate. Customers are able to sit in the restaurants for long hours and use the facilities provided by the restaurant. Many Cha Chaan Tengs are also opened until very late hours as most football matches are broadcasted in midnight in terms of the time in Hong Kong, thus many of the restaurants have at least one TV in the restaurant. Only Tsui Wah provides 24 hour service in Wellington Street, not only are there a high flow of customers during the day, there are also many customers at night, as there are many nightclubs and bars located nearby, hence many people would visit Tsui Wah after a night out.3. Conclusion To answer the question of “Which market structure best describes the Cha Chaan Teng Market in Wellington Street, Hong Kong?”, I can conclude that the market monopolistically competitive. Regarding the hypothesis stated at the beginning of this investigation, the market does resemble a monopolistic competition market. This can be supported by the large number of firms present in the whole market and 25% of restaurants in Wellington Street being Cha Chaan Tengs. Although there are larger chain firms present in the market, they only possess a small percentage of market share, thus are unable to dominate the market. Furthermore, barriers to entry are low as the setup cost is fairly low. The rent of a street shop in the area is significantly lower than other popular areas and the cost of individual equipments is not high and the cost of licensing requires a low cost per month. Furthermore, although advertising campaigns are used by firms in a monopolistically competitive market to compete, it is not an important and useful feature in this market and is normally utilized by large chain firms only. The low sunk cost allows firms to enter or exit freely. The research carried out provides more evidence of the market resembling a monopolistic competition market. The price survey suggests that there is product differentiation in the market and firms specialise in different dishes in order to differentiate themselves and maintain market share. Additionally the customer survey suggests that brand reputation acts as the biggest form of competition within the market. This implies that the biggest form of competition within the industry is non-price competition. Brand loyalty exists in the market as 90.5% of customers only dine in Tsui Wah according to the survey. 4. EvaluationDuring the research, the documents used to analyze the market share of different firms were published in 2011, therefore the data used may not be up-to-date and are subject to changes. Only the CEO of Tsui Wah was interviewed, therefore the opinion offered may be biased, and hence the results of this investigation may be biased. The characteristics of abnormal and normal profit earned in the market cannot be confirmed as I was unable to find data from other firms apart from Tsui Wah to compare the profit earned. The data about market share looks at the market as a whole, not just firms within Wellington Street, therefore, the results may be less accurate The area investigated is only a small portion of the whole market due to limitations in time. Therefore, not all of the characteristics of the market may be displayed. There are many more Cha Chaan Tengs in Central area, therefore tt would be better if a larger area was investigated, for example the whole Central district in Hong Kong. The XPED of products is based on a theoretical price of the products therefore the value is only hypothetical, hence it could be very different in reality and it may not represent customers’ real reactions towards price changes. For further investigations, it may be more beneficial to use real figures of the changes to quantity demanded after a change in price to calculate the XPED. Because of time constraints and the specialisation of each restaurants, the price survey is only limited to three samples, which is not large enough to represent prices of all products. If more products can be examined, it would allow for a more accurate representation of the price competition between firms. Furthermore, the price of products cannot be fully compared, as each restaurant would specialize in different types of products, hence they do not necessarily sell the same dishes.