Market Model Patterns of Change

The Coffee Industry 1

The Coffee Industry (Starbucks vs. Dunkin Donuts)

Abstract

There are little facts about the role of obedience when doing evil actions up until now (1961). Most theories suggest that only very disturbed people do horrible actions if they are ordered to do so. Our experiment tested people's obedience to authority. The results showed that most obey all orders given by the authority-figure. The conclusion is that when it comes to people harming others, the situation a person's in is more important than previously thought. In contrary to earlier belief, individual characteristics are less important.

Introduction

Current theories focus on personal characteristics to explain wrong-doing and how someone can intentionally harm others. In a survey, professionals such as doctors, psychologist and laymen thought that very few out of a population (1-3%) would harm others if ordered to do so.

In the recent war trial with Adolph Eichmann, he claims to "only have been following orders". The author wanted to test whether this is true, or just a cheap explanation. Can people harm others because they obey the orders? Are good-hearted people able to do this?

The experiment will test whether a person can keep giving electric shocks to another person just because they are told to do so. The expectation is that very few will keep giving shocks, and that most persons will disobey the order.

Results

Of the 40 participants in the study, 26 delivered the maximum shocks. 14 persons did not obey the experimenter and stopped before reaching the highest levels. All 40 participants continued to give shocks up to 300 volts.

Discussion/Conclusion

Most of the participants became very agitated, stressed and angry at the experimenter. Many continued to follow orders all the time even though they were clearly uncomfortable. The study shows that people are able to harm others intentionally if ordered to do so. It shows that the situation is far more important than previously believed, and that personal characteristics are less important in such a situation.

The Economic Lesson

I suspect Starbucks is very good at thinking at the margin. They start with their basic tall cup of coffee for the frugal customer. Then though, extras are pricey. Order a red eye (a shot of espresso in the coffee), an extra flavor, or a Clover, and the price pops.

Next time you are in Starbucks, check how long you stood in line. They care. To save 14 seconds, for example, Starbucks designed a larger ice scoop which baristas could use for one dip instead of 2. Still though, in a "mystery shopper" survey of "limited service restaurant brands," Starbucks was #6 in wait time, behind Dunkin' Donuts (4 minutes 3 seconds) during 2008. Also concerned about line time, the NYC Columbus Circle Whole Foods uses a line manager, a single line system, and an unusually high number of check-out registers.

The science of line movement is called queue management. One researcher says that we respond favorably to a wait time of up to 3 minutes. Then, though it starts to feel longer than the actual time. Also, our response can depend on what we are waiting for. People might not want to wait at a gas station but will accept long lines for new iPhones and concert tickets.

The Economic Lesson

Firms that compete in a market with many consumers and many firms are in a monopolistically competitive market. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. With Starbucks and Dunkin Donuts in a monopolistically competitive market, they can use their coffee, their product assortment, their image, and their wait time to compete.

When Starbucks raised its prices during the beginning of 2010, it lowered the price of a tall regular to $1.70. But, if you wanted a splash of