TY  - JOUR
AU  - Levitt,Steven D.
TI  - An Economist Sells Bagels: A Case Study in Profit Maximization
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12152
PY  - 2006
Y2  - April 2006
UR  - http://www.nber.org/papers/w12152
L1  - http://www.nber.org/papers/w12152.pdf
N1  - Author contact info:
Steven D. Levitt
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, IL  60637
Tel: 773/834-1862
Fax: 773/702-8490
E-Mail: slevitt@midway.uchicago.edu
AB  - 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.
ER  -