Question

The following is an article from the Wall Street Journal:

Wall Street Journal -- SUMATHI REDDY

of 2 Bros. Pizza.
But this is no run-of-the-mill slice; it's a "Supreme Slice."

"The BIGGEST and BEST Slice we have ever made," reads the sign trying to lure passersby at the 36 St. Mark's Place location.

Thrifty spenders, never fear: The $1 pizza model proliferating across the city isn't going anywhere.

According to Eli Halali, who owns the 2 Bros. Pizza chain with his brother, the 50% price hike is an experiment to gauge customer reaction to a larger and higher-quality slice. The pilot, he said, is feasible because customers turned off by the higher price need only walk three storefronts down to the chain's 32 St. Mark's Place location, where slices remain $1.

If successful, Mr. Halali said the chain would consider adding the Supreme Slice at some of its other locations, in addition to keeping the $1 slice. He stressed that the $1 slice was in no way in jeopardy.

"We're feeling the customers out, seeing what they think of this particular slice," he said. "This may or may not be an item that we may add to the menu if people want a bigger slice."

The Supreme Slice is cut from a 22-inch pie, versus the normal 18 inches. The sauce is different, made with plum Italian tomatoes; and the baking process is longer and more involved, said Mr. Halali. (He declined to provide details on the normal sauce.)

"It's a little bit more quality," he said.
On St. Mark's Place Monday, some were stumped to find themselves being charged an extra 50 cents. A 15-year-old high-school boy headed to the $1-a-slice outpost after hearing the price.

But others, like Marko Gojcaj, a superintendent of a nearby building, were happily devouring the Supreme Slices. They're well worth the extra cost, he said. "It's bigger and the sauce is different," the frequent 2 Bros. Pizza customer said. "To me, it's more tasty. More cheese—and the sauce, they change it."

One of the 2 Bros. $1 slices is at left and a Supreme Slice is at right.

He wasn't sure exactly how the sauce tasted better, but when prompted quickly agreed that it did. Was it sweeter?

"It's sweeter, yes," he exclaimed.

Next to him was Ravi Viswanathan, a consultant who saw no difference. "It's not noticeable," he said. "I don't expect great taste for $1 and I don't expect better taste for $1.50."

The city's dollar-pizza scene is fiercely competitive, fueled by 2 Bros. and 99¢ Fresh Pizza. 2 Bros., which opened at 32 St. Mark's Place in 2007, now has a dozen stores, with another slated to open soon in the Bronx.

Meanwhile, 99¢ Fresh Pizza, which opened in 2000, has eight stores and a ninth expected to open on West 40th Street.

d by much Grace Baez, 13 years old, and her brother Kevin, 15, eat $1.50 Supreme Slices in front of the 36 St. Mark's Place location

Two pizza joints on the same block in the East Village, both part of the 2 B

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more than a few storefronts: As of last week, one began selling its famed $1 slice for $1.50.

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Some have dared to go below $1. When a 99¢ Fresh Pizza opened across the street, Ray's Pizza on Broadway between 54th and 55th streets started selling 75-cent slices last year. What was supposed to be a temporary promotion lasted months, and the establishment eventually raised prices to 99 cents. Then, a few months ago, it returned to the more average price of $2.75 plus tax (rounding out to $2.99), according to a manager who answered the phone there.

A price war that erupted in March between a 2 Bros. Pizza on Sixth Avenue and an adjacent Bombay Fast Food/Pizza King has pizza prices holding steady at 75 cents.

Mr. Halali said they lose money on the 75-cent slices, but subsidize it with strong sales of sides of chicken.

Meanwhile, Mohammad Abdul Hai, owner of 99¢ Fresh Pizza, said he has no plans to add a different type of slice. He will remain at the price he has always charged, which, oddly, is not 99 cents. His slices cost 89 cents plus tax, for a total of $1.

END

Reply to the following Questions on the BB Discussion Board:

From the article above:

“According to Eli Halali, who owns the 2 Bros. Pizza chain with his brother, the 50% price hike is an experiment to gauge customer reaction to a larger and higher-quality slice. The pilot, he said, is feasible because customers turned off by the higher price need only walk three storefronts down to the chain's 32 St. Mark's Place location, where slices remain $1.”

Q 1. Relate this statement to elasticity and explain why the owner would be interested in finding the elasticity of demand for his pizza slices.

Q 2. If Mr. Halali hired you to be his economic consultant, what would you suggest he do if sales for pizza slices declined after raising the price to $1.50?

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Now, draft a response to the question(s) below:

From the article: “According to Eli Halali, who owns the 2 Bros. Pizza chain with his brother, the 50% price hike is an experiment to gauge customer reaction to a larger and higher-quality slice. The pilot, he said, is feasible because customers turned off by the higher price need only walk three storefronts down to the chain's 32 St. Mark's Place location, where slices remain $1.”

Q1. Relate this statement to elasticity and explain why the owner would be interested in finding the elasticity of demand for his pizza slices.

Q2. If Mr. Halali hired you to be his economic consultant, what would you suggest he do if sales for pizza slices declined after raising the price to $1.50?  

Answer 1

Q1. The owner is interested in finding elasticity to understand the volatility of the demand. As we aware that Price and demand of the product are inversely related ( Normal Product), the rise the price of the Pizza by 50% would definitely have a negative impact on his sales and revenue. Even though the product is exceptionally good.

Q2. I don't suggest Mr. Halali Increase the prize of the pizza by 50% for the following reasons.

• The demand will decrease for sure as the product is not worthy of 1.50$, so the consumer's reactions will definitely be different As their affordability will decrease and they may also feel less satisfied by paying more to the same quantity of Pizza.
• Product has many substitutions in the market for the same or even lesser price, it will be very risky to experiment with rising in price by 50%