Fresh Bagels Hot Off the NBER Press

A while back, Levitt and I wrote an article about a former economist in Washington, D.C., who sells bagels and donuts on an honor-system payment scheme. We later adapted that article for inclusion in Freakonomics. Now Levitt has posted a National Bureau of Economics working paper that looks at the Bagel Man’s profit maximization, an important element that we didn’t look at previously. (We were focusing on honesty and theft.) Here’s the money quote:

Using thirteen years of data representing more than 80,000 deliveries, I find that the company is extremely adept at determining how many bagels and donuts to deliver to a particular customer on a given day. In stark contrast, the company appears to price on the inelastic portion of the demand curve for the entire period, thereby foregoing a substantial share of available profits. I argue that these results generalize well beyond this particular case study: firms are likely to be close to the efficient frontier on dimensions for which there is frequent and informative feedback regarding profits, but absent that feedback, systematic deviations from profit maximization are more likely.


smili

Interesting. Thanks for posting.

The quantity aspect is very interesting. The vendor where I work lost my business ("Diet Mtn Dew") because the machine was always running out - and I gotta have my Dew - so I now take my own supply. From a consumer viewpoint consistent supply is critical.

Your paper made me think of this article from the Motley Fool regarding surprisingly strong corporate profit growth over the past several years.

The Profit Margin Paradigm
http://www.fool.com/news/commentary/2006/commentary06030104.htm

Is it possible firms have been underpricing and now with better information tech can optimize profitability much better than in the past? Do we have better feedback now?

cournotbertrand

Your vendor is a "distributor" in that he does not just supply the good, but really provides the good combined with a vector of "distribution services." These distribution services are sometimes described as assortment, assurance, accessibility, ambiance, and information. These services are true "goods" in that they are costly to supply and increase the utility of the consumer.

Your situation...onein which your distributor provided inadequate assurance...is not uncommon. Essentially, you have chosen to handle the distribution of the good yourself, Inernalizing the cost of obtaining, transporting, and storing the good.

The comment that "consistent supply is critical" reinforces that DMD is not DMD unless it is bundled with product assurance.

zbicyclist

I've now read the paper. I think Levitt is fundamentally correct about the feedback point

We can further amplify this by noting that measurement of price elasticity is neither straightforward nor unambiguous in its result. It's not straightforward because there are a number of questionable / unverifiable assumptions that need to be made in most real contexts. It's not unambiguous because the results don't have a clear action associated with them.

Note, for example, footnote 24, in which the business owner seems to contend Levitt was wrong about the way to estimate elasticity AND wrong about the action even if he's right about the past elasticity estimate (destroy the party atmosphere and the enterprise is threatened).

We also don't know at what point competitive pressures change, e.g. somebody else starts bringing in bagels: "If he's charging $1.30 for a bagel, I'm going to bring them in and charge $1." This is an example of a threat external to the model, but likely on the mind of the business owner.

Similar ambiguity is much less likely in the stocking context.

Read more...

smili

Interesting. Thanks for posting.

The quantity aspect is very interesting. The vendor where I work lost my business ("Diet Mtn Dew") because the machine was always running out - and I gotta have my Dew - so I now take my own supply. From a consumer viewpoint consistent supply is critical.

Your paper made me think of this article from the Motley Fool regarding surprisingly strong corporate profit growth over the past several years.

The Profit Margin Paradigm
http://www.fool.com/news/commentary/2006/commentary06030104.htm

Is it possible firms have been underpricing and now with better information tech can optimize profitability much better than in the past? Do we have better feedback now?

cournotbertrand

Your vendor is a "distributor" in that he does not just supply the good, but really provides the good combined with a vector of "distribution services." These distribution services are sometimes described as assortment, assurance, accessibility, ambiance, and information. These services are true "goods" in that they are costly to supply and increase the utility of the consumer.

Your situation...onein which your distributor provided inadequate assurance...is not uncommon. Essentially, you have chosen to handle the distribution of the good yourself, Inernalizing the cost of obtaining, transporting, and storing the good.

The comment that "consistent supply is critical" reinforces that DMD is not DMD unless it is bundled with product assurance.

zbicyclist

I've now read the paper. I think Levitt is fundamentally correct about the feedback point

We can further amplify this by noting that measurement of price elasticity is neither straightforward nor unambiguous in its result. It's not straightforward because there are a number of questionable / unverifiable assumptions that need to be made in most real contexts. It's not unambiguous because the results don't have a clear action associated with them.

Note, for example, footnote 24, in which the business owner seems to contend Levitt was wrong about the way to estimate elasticity AND wrong about the action even if he's right about the past elasticity estimate (destroy the party atmosphere and the enterprise is threatened).

We also don't know at what point competitive pressures change, e.g. somebody else starts bringing in bagels: "If he's charging $1.30 for a bagel, I'm going to bring them in and charge $1." This is an example of a threat external to the model, but likely on the mind of the business owner.

Similar ambiguity is much less likely in the stocking context.

Read more...