Extra Credit...

Summary:

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Extra Credit...

APQueenTong 29 Nov 2011 06:12

Real-life scenario: Last week, Pizza Hut lowered the price of all its pizzas to $10, regardless of size or topping. The advertisement states "limited-time offer."
The original prices of Pizza Hut multi-serving pizzas range from $9.99 to $27.99 and can go higher depending on the number of toppings that are ordered. Pizza Hut typically sells a million pizzas nationwide in one week. What economic concepts are illustrated by this price change? What type of firm is Pizza Hut? How does the theory of the firm act on this scenario?

Re: Extra Credit...

mynameisevan 29 Nov 2011 06:49

If I can add something, Pizza Hut is not a monopoly (as Marci indicated), but more of a monopolistic competitor, since it is, in fact, a single producer of pizzas in an entire industry filled with other competitors (Domino's, Papa John's, etc.) selling slightly differentiated products. This would not be an oligopoly, however, because the larger corporations mentioned above still have to compete with small, local restaurants that sell pizza because there are few barriers to entry (another characteristic of monopolistic competition). The larger corporations merely have a natural monopoly of sorts over the local restaurants because those companies have streamlined the process of making the pizzas, resulting in a lower cost to the company and an overall cheaper price to the consumer (take Costco pizzas, for example).

Re: Extra Credit...

Marcinaks 29 Nov 2011 06:35

The law of demand states that as the price of a good rises, the quantity of that good demanded by consumer falls. By making all their pizzas the same price, Pizza Hut can see which pizzas are actually "popular" being that now price is not a factor in the equation. Also this price change is related to the price elasticity of demand which indicates the responsiveness of the quantity demanded of a good to price changes. Since pizza is not an important good since there are other foods available to eat and help you survive, consumers are more likely to forego this good. Pizza Hut is a Monopoly because the marginal revenue for this firm facing a downward sloping demand curve is the price minus the decrease in revenues resulting from the lower prices on all the units previously sold at a higher price. (These units refer to the pizzas with more toppings). The theory of the firms acts on this scenario in which there are many firms (Domino's, Caesar's, California Pizza Kitchen, Papa John's, Harbor Pub, Antonio's etc. and low barriers with a differentiated product.

Re: Extra Credit...

APQueenTong 29 Nov 2011 06:37

10 points Extra credit!

Re: Extra Credit...

Marcinaks 29 Nov 2011 06:41

Yay thank you!