Pizza Theory

4/3/2012

Actually, it's game theory about pizza. In this article from the NY Times the story of three pizza sellers in New York is told. This type strategic business behavior, or game, is known as a Bertrand pricing game. The basic gist is this; each player's dominant strategy is to be the low cost pizza provider. So, as you would assume, the lowest price possible prevails. This is great for us consumers, but what about the producers? What is happening to consumer and producer surplus as the Bertand game plays out? Do you think it is fair for the pizza sellers to keep slashing their prices? What if this was Dominos vs. a local pizza seller, would you still think it was fair?

R10436673

4/6/2012 03:39:47 am

For the producers I would imagine this to be a bad situation. To have a competitor that sells the same thing as your neighbor creates a lot of competition and a lot of stress as a business owner to always out sell your competitor. It wouldn't be fair at all if dominos moved in either because these local businesses wouldn't have a chance to compete with them.

R10386241

4/11/2012 07:06:25 am

I completely agree. Having such intense competition in a market like this creates a nightmare for producers as they simply keep losing more and more money. However, it's obviously a big advantage for us and sends consumer surplus through the roof.

R01948411

4/11/2012 02:05:07 pm

I agree with both comments. The producers are not helping themselves at all by lowering the prices to a point where they are not able to make a profit. It would just rally back and forth between the two businesses until one gives up. While I don't mind a good deal on food, I do not think it is fair, and if it was vs Dominos it would defiantly not be fair to the local restaurant.

R10492644

4/12/2012 08:27:01 am

I agree. I think it makes the stress on a business owner even more present. I am sure it is hard running a business especially in a place like that. I think that if Dominos moved in there wouldn't really be much of a competition because Dominoes would not sell their pizza that low. But how great would it be to have pizza that cheap!!!?

R10310218

4/12/2012 10:25:30 am

I also agree. More competition makes for a harder market to compete and survive in. Especially for smaller companies like "Mom and Pop shops." With prices dropping these smaller companies have a much harder time staying in the profit.

R#10427556

4/13/2012 12:46:14 am

Unfortunately if prices will keep to drop, the quality of the Pizza will go down because sellers want to keep the same profits.

R10361779

4/9/2012 12:24:17 pm

For local businesses I agree that it would be difficult as a producer of a product to compete with your neighbor if you sell the same thing. However, at the same time it would always keep you on your toes and thinking of new ways to keep your business fresh with new ideas and it could be the key to out doing your competitor. I don't think it would have quite the same outcome though if a national known restaraunt competed with a local restaraunt; there would almost be no competition.

R#10432564

4/10/2012 05:17:30 am

I agree that this scenario would be extremely hard on the producers of pizza. However, by making their product the best over all other producers, they wouldn't be suffering. There is also room for growth and improvement, even with making a pizza. If they were making the best pizza in the world, they could get away with charging a higher price and I'm sure they would still get great business.

R10359949

4/12/2012 09:44:49 am

You make an interesting point. I like your claim about the owner making the best pizza being able to charge a decent price. This made me think of the topic we discussed in class of higher prices sometimes being a beneficial thing for a business, giving it a classier image.

r10409494

4/11/2012 05:31:56 am

I also agree that it would be difficult to compete with several other shops that sell the same thing, but a good point is made when they say that it would keep you on your toes. Always thinking of a new product of new ideas that keep your resturant appealing to the public. But on the other had i would say that this is a great thing for the consumers, who doesn't love being able to get a good lunch for less than a dollar?

R10465652

4/13/2012 12:41:38 am

I agree for local businesses it would be difficult to compete for a profit when the competition is fierce. It would be difficult to produce a profit when your main competition is close to your establishment and know what your doing as your doing it. Only way that one of these pizza establishments to make a significant profit would be; to buy out the competition and create a monopoly for that paticular area. Once a establishment own all the paticular business they can produce at whatever cost they wish. These small chain pizza stores would have no chance if a pizza hut or dominos moved close to there competition, and the small stores didn't deliver.

10412481

4/10/2012 05:35:13 am

I agree with both comments, close competition urges both companies to stay ahead of the game and give customers the best deals. However, selling the same product 10 feet away from each other is difficult for producers. Yes, as a consumer, I think it's fair for pizza places to keep reducing the price. One pizza place has got to give in eventually.

10444048

4/11/2012 01:35:44 pm

For the Dominos vs. a local shop no I do not think it would be fair for them to slash their prices. It would destroy local businesses, which keep our country stable. That would turn the market into a monopoly fast. Just look at what Walmart has done to small towns? Our country prides itself on the small business and the entrepreneur's who create this open environment. Small businesses deserve the best, and should be treated with respect for big companies, we all know they can run them out anyday.

R10342974

4/12/2012 01:24:50 am

I don't think this is fair for the smaller pizza parlor that was there first. But this is real life and nothing is completely fair. This situation is the same thing as a Walmart opening in a smaller town that has had nothing but small grocery stores and other small supply stores. When a big, nationwide super store moves into your town you lose all possible business. Walmart can afford low prices and they have an abundance of everything. The new Pizza 2 Bros is the same way. That's why they can afford to go down to $0.50 or even free pizza. They will go down to those prices until the Kings Pizza goes under, then when they haven't more competition they will raise their prices back up to a dollar or even more maybe.

Wesley Quigley

4/12/2012 05:29:22 pm

I agree that it is unfair for the smaller pizza provider. When a large firm comes in in compete with a smaller firm, the larger firm has more endurance and resource to outlast the smaller firm and put it out of business. Once this happens, the larger firm becomes even more powerful and eventually gains the ability to do whatever they want to the prices because they will become very dominant in their field of business.

R10407550

4/12/2012 07:31:59 am

For the smaller pizza parlors that are not nationwide like Dominos every little bit counts. Its impossible to make a good profit with prices that low. With Dominos being such a huge company they can lose a little bit of money here and there without being hurt. In the end all the smaller pizza parlors competing against each other is doing nobody good, and soon many of them are going to go out of business because they can no longer afford to run thier company

R10403116

4/12/2012 09:06:39 am

I agree that it is virtually impossible for these smaller companies to make any kind of a profit with prices that low, however, if one of the companies do end beating out the other, then it is highly probable that they are the more capable business. Dominoes started off as a small business, and through a good business model they have managed to set themselves as one of the leading pizza shops.

R10460329

4/12/2012 09:54:26 am

For the owners, I would imagine this being a terrible situation to be in. In the customers eyes they see pizza and all of it is generally the same. so they could care less, as long as they're getting pizza. Eventually their businesses will close down due to lack of money.

R10409604

4/12/2012 01:04:33 pm

I agree with this comment that the immense pressure and stress that would go on the owner would be horrible. Although it does help us that prices are going down, it will ultimately put the pizza parlor out of business because the prices are going so low that they can no longer make profit.

R10390341

4/12/2012 10:30:07 am

Of course large companies like Dominoe's make it extremely difficult for new smaller companies to succeed. Large companies have achieved a high reputation by already having a well liked product, or else that wouldn't have succeeded in the past. However, in my opinion I do believe it is fair. Every company has started out small at one point in time, and only the strongest and most competitive survive. Which almost forces new business owners to come up with new working ideas to achieve success.

10410186

4/12/2012 11:18:20 am

In my opinion, it would not be fair to set Dominos near any small pizza businesses. In the business world the word "fair" hardly exists. If they keep slashing prices it helps out the consumer. If the comsumer is happy then business will countinue to get customers for lower prices but lots of them.

10326603

4/12/2012 11:50:42 am

I don't think this is fair. Both places are battling it out no matter how much it harms their own store at the same time because it's all about pride. Neither want to be the first to raise the price back to a comfortable amount to make the struggle not as bad. This would be even worse if Domino's crushed a local pizza parlor by slashing prices. The poor little shop would be driven out of business quickly.

R10413028

4/12/2012 01:52:56 pm

I completely agree with your comment! I think that both local pizza places are being stubborn and stupid because they are too full of pride to actually do what is right for their business. And yes, I agree that if a Dominos was added to the mix it would just be cruel because they would drive out the local businesses that are helping to keep our country stable.

10300090

4/12/2012 12:38:50 pm

I think its fair when the competition is equal. But i love competition for me as the consumer! Especially when a walgreens and a cvs are across the street from each other.

R10403506

4/12/2012 01:46:36 pm

I wish One Guy charged a dollar a slice, but as for the actual problem at hand, many people face being shut down by big companies. It's always been a problem. I find it to be unfair but at the same time the bigger company had to have started somewhere. With their proper strategies in selling, they have become something bigger which in the end makes them better. Unfair to people with hearts it is, but it is fair to business mindset people everywhere.

R10506939

4/12/2012 03:37:38 pm

The game being played in the NY pizza market is beneficial to consumers but hurtful to producers as they slash profits in order to stay competitive. They have to decide wether to take less money and stay in business or charge more money and be shut down completely. They have to generate more supply which means more labor, in order to reach their equilibrium.

R10435313

4/12/2012 07:53:12 pm

Its not as simple as taking less money and staying in busines... if you dont make profit you go out of business easily...Apparently the Pizza King guys weren´t thinking like economists at all, when starting the prize war, going from a dollar a slice to 79 cents. You can ONLY do this if you´re sure that your financial resources are bigger than those of your competitors, so that you´re the only one staying afloat. Otherwise its suicide. Also to generate supply won´t help. If the prize of the pizza you´re selling is generating losses and you increase your workforce, you will just lose more money. I mean the extra employees will cost more than the revenue they generate... I believe the only option the Pizza Kings had or might still have is to make a difference through their products and quality. In this field they can compete or attract a different clientele than their competitors.

R10429661

4/13/2012 12:16:26 am

For consumers this "problem" is awesome, I mean 75 cents for a big homemade slice of pizza.. you can not beat it. Also from the consumers eye though I can tell that 75 cents is not going to be able to make them a profit and that is hard to handle for the pure sense of sympathy. I think that they should both charge a reasonable price and see what happens instead of purposely trying to ruin someone business and potentially their lives.

R#10337293 link

4/13/2012 12:24:23 am

This kind of cut-throat business in mid-town NYC ... one of these guys is going to end up dead soon, or at least with some serious property damage. Stereotyping? Maybe... but when you're looking at families being put out by some chump in arm's reach, well... things can get hairy quickly.

The other comments have mentioned it, but I'll reiterate it: this kind of price-slashing technique is okay for the short run, to lure customers in, but in long-run thinking -- like the owners of 6Ave. suggest -- this will absolutely destroy at least one of them, the one who keeps cutting prices. They can add fried chicken or jewelry or even gas pumps to their business all they want, but if they still sink $1.50 for supplies per pizza slice and only charge $0.50 -- or god forbid, nothing -- for them, they're still going to sink.

R10962697

4/13/2012 12:35:27 am

This has got to be an absolute nightmare for the Pizza shop owners. To have some selling the same product right next to you. You must pretty much bring down your price or guarentee your pizza is much better. I bet atleast one of these places goes out of business.

R10404051

4/13/2012 12:41:50 am

Agreed. The competition has got to be pretty high when the stores are next to each other. But lowering the prices to where these owners are making no profit is not a good idea. Atleast one of them would lose business.

Robert Ainslie

4/19/2012 09:54:13 am

For both producers this will continue to be a big problem. Considering both businesses want to continue have consumers then they have no choice but to slash prices to stay at equilibrium with the opposing pizza business. An a dominos moving in would be just the same problem as they are having. Maybe since its a big name that more consumers would be attracted to them but its pretty impossible to tell.

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