Transcript PPT - WWZ
EXECUTIVE SUMMARY • Cupcake Craze $3 for Flour • Theoretical Application & Sugar • Competition Georgetown • Survey Results Cupcake • The value of a cake in a cup • Recommendations & Implications Conclusions WHAT’S SO GREAT ABOUT CUPCAKES ANYWAY? washingtonpost - the cupcake line. The cupcake phenomenon – can you really bake dollar bills? Why do you buy Georgetown Cupcake? 15 7 6 4 0 1 0 1 CUPCAKENOMICS Foundational Theory: “Demand by a typical consumer is positively related to quantities demanded by other consumers and demand for a good by a person depends positively on the aggregate quantity demanded of the good.” Three possible explanations: 1. Demand curve is positively sloped 2. It makes sense not to increase supply 3. It makes sense not to increase price Becker, S. Gary, “ A Note on Restaurant Pricing and Other Examples of Social Influences on Price”, The Journal of Political Economy, Vol. 99, No. 5 (Oct., 1991), pp. 1109-1116 Karni, Edi & Levin, Dan, “Social Attributes and Strategic Equilibrium: A Restaurant Pricing”, The Journal of Political Economy, Vol. 102, No. 4 (Aug., 1994), pp. 822-840 COMPETITIVE RESPONSE TO EXCESS DEMAND S1 S2 Revenue1 = p1 * q1 P/$ Revenue2 = p2 * q1 p2 Gap Revenue3 = q2 * p1 p1 D1 D2 q1 q2 Q THE DEMAND CURVE Popular Goods’ demand curve has positive slope (D2) Unrealized Revenue = p1 *(q2 – q1) They consciously do not satisfy the demand. Popular goods’ consumers are fickle. If they loose confidence other consumers want the good, their demand will drop They constantly advertise or increase their publicity to convince consumers that demand to their goods is still high S1 P/$ p2 Gap p1 D2 D1 q1 q2 Q CONCLUSION FOR HIGH DEMAND FOR AN EXCLUSIVE GOOD People do not want to step out of what is popular . The importance of being “in” – Georgetown Cupcake as a status symbol Consumers look to satisfy two types of needs material (hunger) and social (being “in”) CONCLUSION FOR NOT INCREASING SUPPLY The gap between what is demanded and what is supplied affects demand when consumers get utility from competing for goods that are not available to everyone who wants them CONCLUSION FOR NOT INCREASING PRICE Theory suggests customers are fickle and booming business is fragile. “As for economic theory, I am not sure, all I know is that if you have a quality product, demand will be high, and if it is consistently of high quality, demand stays constant. We have kept our cupcakes at $2.75 because it works.” ▪ Laura Pyatt, Catering Manager, Georgetown Cupcake WHY ARE PRICES SO STICKY?* The reason that prices of cupcakes do not rise may stem from these facts: May be employing cost based pricing -- as costs have remained constant they cannot raise the price or afraid that they cannot justify the increases in price by increases in their costs Implicit contracts: GTCC response to our pricing question suggests that they might not also be increasing their prices due to fact that they think that they have an implicit contract with their customers. Any change might deter customers. *Blinder, S. Alan,” Why are Prices Sticky? Preliminary Results from an Interview Study”, The American Economic Review, Vol. 81, No. 2, (1991) pp. 89-96 LINECONOMICS QUIZ: You’ve been standing in the line for 10 minutes. The longer the line gets behind you…? More likely to stay in line. More likely to leave the line. I just had a day dream about a giant cupcake. Queuing Theory Opportunity v. Sunk Cost Compensating for the wait The longer the line…..? Chocolate & Vanilla? Red Velvet. COMPETITIVE ANALYSIS Small Medium Large $4.50 $3.85 $3.75 $3.25 $3.00 $2.75 $3.25 $3.25 $3.00 $2.75 $2.00 Georgetown Cupake** Magnolia Bakery NY Cupcakes Dean & DeLuca** Something Sweet* * Located in the district ** Located in the district and on M street Sprinkle Crave Cupcake Baked & Wired** Crumbs ESTABLISHED MARKET POWER Most of the customers came to the store because the saw the TLC show “DC Cupcakes” (44%). They do not see other cupcakes as a substitute for Georgetown Cupcakes (only 6% of the respondents told that they would consider buying another cupcake). This shows that they have a high degree of market power. 75 % of the respondents said they did not know another place On M street, which we think is the relevant geographic market that Georgetown Cupcakes operates, that sells cupcakes. SURVEY RESULTS DETERMINE DEMAND & QUEUING EFFECT Quantity Demanded at Higher Prices 67% were not discouraged by the long lines before buying Georgetown Cupcake $8.00 $7.00 24 24 $6.00 36 36 $5.00 40 56 Price $4.00 70 100 70% indicated that the price of a GTCC was not an influential factor for their decision to wait in the line $3.00 116 $2.00 $1.00 $0 20 40 60 80 Quantity 100 120 140 RECOMMENDATIONS & CONCLUSION Pricing doesn’t matter: Only 59% of the customers knew how much a regular cupcake cost before they bought a cupcake. Based on survey results, customers don’t judge the value of a cupcake on price. The line matters most: People are attracted to the cupcake because of the popularity of it, illustrated by the line. Company choices do not always make economic cents: GTCC is not using its market power to maximize profits. Yet, cupcake prices do make sense: Increasing the price of cupcakes won’t diminish the queue, but will could hurt repeat business. CUPCAKE QUESTIONS?