New York’s pizza price war has ended.
During April, we could buy a 75-cent slice of pizza in midtown Manhattan. The brief price war that brought the price down from $1.50 to $1.00 to $.79 to $.75 has ended. As it unfolded, one owner said, “I’m thinking, God help me.” Another was researching NYC pricing laws for pizza to see if 75 cents a slice was illegal. Still though, they said price could slide to 50 cents and less.
Yesterday, I read that after the owners were seen talking on the street, the slice price at both establishments rose to $1– a 33 1/3% increase. Such a relatively large price pop seems not to have dampened consumer demand. As an antitrust violation (2 owners probably price colluding), it seems also not to have attracted federal or state authorities.
The impact on pizza eaters can be explained by the economic concept of elasticity. Related to how much a price change affects the quantity that we demand, price elasticity of demand varies. If a car or a house or even a pint of strawberries goes up by 1/3 then we might respond because the items take a huge chunk of our paycheck or are luxuries that can be bypassed. By contrast, for low priced items and necessities, when price goes up by a large percent, our buying behavior remains relatively constant.
Perhaps a slice of pizza, being inexpensive and a necessity is in the inelastic category.
Called “A Lot of Pizza for a Little Dough,” this Bloomberg news video gives you a firsthand view of the fight. Then, you can read more about this pizza price war at econlife and in these NY Times before and after articles.
No one wins a pizza war.
Having read a NY Times article about a pizza price war in NYC, I was curious about the supply side of the pizza business. So, this afternoon, I interviewed my local pizza counterman.
The pizza price war in midtown NYC involves 3 almost adjacent pizza places. Originally charging $1.50 a slice, one of the three dropped its price to an astonishingly low 75 cents and soon, a second shop did also.
One owner’s reaction, “I’m thinking, God help me.” Another was researching NYC pricing laws for pizza to see if 75 cents a slice was illegal. Still though, they said price could slide to 50 cents and less.
But here is the problem. Listening to my pizza man in NJ, I could see that climbing commodity prices affected him. Wheat for the flour, tomato for the sauce, 1500 pounds of mozzarella each week at $2 a pound, and a fuel surcharge for each delivery he receives. He estimated that the ingredients for a pie cost him $5 and that at best, 75 cents a slice was break even.
So why engage in a price war? Yes, there is minimal product differentiation, consumers are price sensitive and they exhibit little “brand” loyalty. However, a price war can be a negative sum game. In this war, no one wins.
The bottom line: Pizza shops compete in monopolistically competitive markets. While price competition is typical, they can engage in non-price competition by making their product unique.
My sources: Costs are from the counterman at Hickory Pizzeria in Chatham, NJ. Information about the NYC price war is from the NY Times. Discussion about the downside of price wars is from here and here and here.