An Economist Sells Bagels: A Case Study in Profit Maximization / Steven D. Levitt.

By:

Levitt, Steven D

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w12152.Publication details: Cambridge, Mass. National Bureau of Economic Research 2006.Description: 1 online resource: illustrations (black and white)Subject(s):

L2 - Firm Objectives, Organization, and Behavior

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: Profit maximizing behavior on the part of firms is a fundamental, but rarely tested, assumption of economics. In this paper, I analyze the decisions made by an MIT trained economist running a company that delivers bagels and donuts. The simplicity and transparency of the business (e.g. marginal cost is easily observed) allow for direct tests of profit maximization in the quantities delivered each day and the prices that are charged. 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.

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Working Paper	Biblioteca Digital	Colección NBER	nber w12152 (Browse shelf(Opens below))	Not For Loan

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April 2006.

Profit maximizing behavior on the part of firms is a fundamental, but rarely tested, assumption of economics. In this paper, I analyze the decisions made by an MIT trained economist running a company that delivers bagels and donuts. The simplicity and transparency of the business (e.g. marginal cost is easily observed) allow for direct tests of profit maximization in the quantities delivered each day and the prices that are charged. 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.