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Pizza price war

In oligopoly markets, because there are a small number of firms, each firm is affected by its rivals’ decisions. This interdependence results in a tension between cooperation and competition. On the one hand, firms collectively benefit from cooperating and keeping prices high.

On the other hand, an individual firm then has an incentive to undercut its rivals to steal a larger share of the market. This incentive to undercut can potentially result in price wars between firms. This is exactly what has recently occurred between pizza sellers on the Avenue of Americas in Midtown New York. Here, until recently the 6th Ave. Pizza company was selling pizza for $1.50 per slice. However, the entry of two competitors nearby sparked an intense and bitter price war.

First, an outlet called Joey Pepperoni’s Pizza opened nearby and charged $1 per slice. This price was then matched by the 6th Avenue Pizza company. Then, the 2 Bros. pizza chain opened an outlet almost next door to the 6th Avenue Pizza company. Initially, they also charged $1 per slice.

However, this did not last for too long. First 6th Avenue cut its price to 79 cents and then 2 Bros. responded by cutting its price to 75 cents, which 6th Avenue quickly matched.

Which company started this price war has been subject to some debate. The owners of the 6th Avenue Pizza company were angry, alleging that 2 Bros. was trying to force them out of business. However, the owners of 2 Bros. claimed that they were simply responding to the 6th Avenue Pizza company’s decision to start charging 79 cents per slice and they even have evidence from their security cameras confirming this! When asked why they cut their price the owners of the 6th Avenue company said that:

He was taking away our customers. How were we going to pay our rent?

So what will happen next in this market? One of the owners of the 2 Bros. company has said that they will go back to $1 per slice if the 6th Avenue Pizza company does the same, as they can’t make any profit at the current price. However, the tension between cooperation and competition suggests this may be difficult to sustain.

In the meantime, both are quoted suggesting that they may be tempted to reduce prices even further. 6th Avenue Pizza company stated:

We may go to 50 cents. I want to hit him. I want to beat him.

2 Bros. said:

We might go to free pizza soon.

Of course, while the price war continues, the clear winners are the consumers. In the article one is quoted as saying:

I think it’s beautiful. We need 75-cent hamburgers next.

Pizza wars Legal as she is spoke, Drew Carroll and Nadia-Elysse Harris, (24/04/12)
Pizza price wars Econlife (04/05/12)
Lessons from a New York City pizza price war Pricing for profit, Rafi Mohammed (16/04/12)

Questions

  1. Why is it difficult for firms to maintain high prices in oligopolistic markets?
  2. What are the key features of competition in the pizza market?
  3. Is this the type of market where you would expect price wars to be likely?
  4. How might firms in this market try to differentiate their product?
  5. Do you think prices will ever return to $1.50 per slice in this market? Explain.
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