General Discussion
In reply to the discussion: From an Ex CEO: Why John Schnatter's comments about a 20 cents add on are laughable. [View all]unblock
(52,220 posts)it's very likely to be correct in practice. the papa john's ceo is playing on the common misperception that marginal cost increases necessarily result in marginal product price increases. the article is correct in pointing out that the relationship is not so direct.
we've all heard stories about the huge markup for coca-cola syrup -- like it costs them three cents a gallon to make but they sell it for many, many times that. if costs went up to four cents a gallon, would they really increase their price? hardly, it would just eat into their huge profits.
businesses set prices to maximize profit. generally speaking, that means maximizing revenue. so you set prices as high as you can such that if you increased them any further, the customers you lose would outweight the revenue you gained from the higher price. and similarly, lowering prices wouldn't attract enough customers to make up for the lower revenue from lower prices.
marginal costs per pizza shift this calculation because given two similar price points, you'd prefer higher price because it means fewer pizzas for similar revenue and therefore fewer employees and therefore lower costs -- meaning greater profit even if from slightly lower revenue.
so in theory, the papa john's ceo have a point. if a 3% increase in pizza prices means only a 3% drop in pizzas, then the revenue would be similar but the cost would be less. in practice, however, this is too small a change to result in a noticeable savings in labor costs. individual stores are unlikely to be able to reduce headcount even by one person from such a small decrease in demand. moreover, papa john's is a franchise business, so these costs are borne by franchisees, not corporate. corporate has no need at all to raise their prices, and many of the franchises would be exempt because they have fewer than 50 employees.
so in practice, this is a valid critique, even if it's glossing over some relevant details.