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An Economist Sells Bagels: A Case Study in Profit Maximization


  • Steven D. Levitt


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.

Suggested Citation

  • Steven D. Levitt, 2006. "An Economist Sells Bagels: A Case Study in Profit Maximization," NBER Working Papers 12152, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12152
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    References listed on IDEAS

    1. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-1116, October.
    2. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, 2007. "Econometric Tools for Analyzing Market Outcomes," Handbook of Econometrics,in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63 Elsevier.
    3. Steven D. Levitt, 2006. "White-Collar Crime Writ Small: A Case Study of Bagels, Donuts, and the Honor System," American Economic Review, American Economic Association, vol. 96(2), pages 290-294, May.
    4. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-784, July.
    5. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
    6. Anil K Kashyap, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 245-274.
    7. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    9. Feldman, Paul, 1971. "Efficiency, Distribution, and the Role of Government in a Market Economy," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 508-526, May-June.
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    Cited by:

    1. Huck, Steffen & Rasul, Imran & Shephard, Andrew, 2012. "Comparing charitable fundraising schemes: Evidence from a field experiment and a structural model," Discussion Papers, Research Unit: Economics of Change SP II 2012-303, Social Science Research Center Berlin (WZB).
    2. Cho, Sungjin & Rust, John, 2008. "Is econometrics useful for private policy making? A case study of replacement policy at an auto rental company," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 243-257, July.
    3. Levin, Andrew T. & David López-Salido, J. & Nelson, Edward & Yun, Tack, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 48-62, October.
    4. Steffen Huck & Imran Rasul & Andrew Shephard, 2015. "Comparing Charitable Fundraising Schemes: Evidence from a Natural Field Experiment and a Structural Model," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 326-369, May.
    5. Adams, Christopher P., 2007. "Estimating demand from eBay prices," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1213-1232, December.
    6. Bandiera, Oriana & Larcinese, Valentino & Rasul, Imran, 2015. "Blissful ignorance? A natural experiment on the effect of feedback on students' performance," Labour Economics, Elsevier, vol. 34(C), pages 13-25.
    7. Kenneth Kovash & Steven D. Levitt, 2009. "Professionals Do Not Play Minimax: Evidence from Major League Baseball and the National Football League," NBER Working Papers 15347, National Bureau of Economic Research, Inc.
    8. Huck, Steffen & Rasul, Imran, 2011. "Matched fundraising: Evidence from a natural field experiment," Journal of Public Economics, Elsevier, vol. 95(5-6), pages 351-362, June.
    9. Francine Lafontaine & Jagadeesh Sivadasan, 2009. "Within-firm Labor Productivity across Countries: A Case Study," NBER Chapters,in: International Differences in the Business Practices and Productivity of Firms, pages 137-172 National Bureau of Economic Research, Inc.
    10. repec:pri:cepsud:226shephard is not listed on IDEAS
    11. Asplund, Björn Marcus, 2007. "A Test of Profit Maximization," CEPR Discussion Papers 6177, C.E.P.R. Discussion Papers.

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    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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