South-Western EconNews: Small Firms May Lose Slice of Pizza Delivery Market

Small Firms May Lose Slice of Pizza Delivery Market

Subject

Short and Long-run Equilibrium

Topic

Monopolistic Competition

Key Words

Firms, Industry, Market

News Story

In Britain, pizzas are delivered by pizza restaurants and by outlets that also sell other food like burgers and kebabs. It is estimated that there are as many as 4,000 pizza delivery companies. The big three firms are Perfect Pizza, with over 200 outlets. Domino's Pizza, which expects to have 200 delivery outlets by March 1999, and Pizza Hut, which has 170 restaurants which also delivers.

The CEO of Perfect Pizza expects that up to half of the pizza delivery operators will drop out of the industry over the next five years, leaving the big players with 65 percent of the market. However, some would remain in business, selling other kinds of food.

The CEOs of both Perfect Pizza and Pizza Hut agree that pizza delivery is booming. At present, 20 percent of all pizzas consumed are delivered. It could increase to 40 percent.

(Updated November 11, 1998)

Questions

1.	a) In spite of there being three relatively big pizza delivery companies, the pizza delivery industry can be argued to be monopolistically competitive. Why might this be? Explain in terms of their market share.
	b) If the prediction of the CEO of Perfect Pizza is correct, what kind of market structure will the pizza delivery have in the future?

2.	Draw a diagram of a firm in the pizza delivery industry. The axes should represent prices and costs on the one hand, and output on the other. Include the average total cost and marginal cost curves, as well as the demand and marginal revenue curves. Assume that the firm makes a loss because its costs are higher than those of larger pizza deliverers.
	a) It is predicted by one large firm that up to one-half of pizza delivery firms may disappear over the next five years. Why might this occur? Refer to your diagram.
	b) What will happen as a result to the demand curves for the remaining firms? Illustrate on your diagram.
	c) What will happen to the loss of a typical firm that remains in the industry in the long run?

Source

Clare Oldfield, "Small pizza shops face chop", Sunday Times, September 20, 1998