Strengthening Constitutional Self-Government

No Left Turns

The Actual Cost of a 23-cent Pizza

Last Thursday Papa John’s stores in Ohio offered pizzas for 23 cents, the chain’s way of apologizing for the actions of one franchisee who had the temerity to distribute a t-shirt that contained an unflattering statement about a certain local sports hero.

As you’d expect for a deal like this, people flocked to Papa John’s stores, forming long lines so that people waited on average between two and three hours to get their apparently cheap pizza. Of course, that means that the pizza didn’t really cost 23 cents--it cost 23 cents plus whatever the people who bought it thought that two to three hours of their time was worth. It would appear that those who went running to Papa John’s stores last Thursday estimated the value of their time at something less than four dollars per hour. Will someone please explain to me, then, why the minimum wage in Ohio is $7.00?

Discussions - 20 Comments

Classic case for why productivity suffers. Real people don't sit down and make rational, economic calculations as to how much their time is worth.

The chances are slim to none that any of those waiting for that cheap pizza would work those extra hours instead of standing in line.

Even if they had that choice, which they most likely did not. Given the reality of how most folks are employed, chances are they a) were off-shift, b) took sick or vacation time, c) played hooky.

I would rather eat nails than stand in a long line.

OK, not really, but I sure as heck don't like long lines.

On the other hand there is no real reason to discourage such irrational behavior, since the people who are so hard core about getting a good deal help check inflation. This isn't by the way a limited phenomenon. A lot of people will travel half way across town to save two cents on a gallon of gas, the number of economic faux pas is so large as to bring into serious question what all the ceterus paribus assumptions about rational behavior end up looking like on a macro scale. For one thing were it not for such people the elasticity of demand curve for all sorts of products would look different. Which by the way is why businesses spend a lot of money crunching data sets to determine exactly what the elasticity of demand for specific demographics and commodities are. Some people get a big kick out of getting the most out of a dollar, and you can make money in down cycles running a good dollar store or Aldi's but by and large it is much easier and more profitable to target people who have brand loyalty. The strange thing is that it seems that if everyone operated like economists we would soon outsmart ourselves.

My son and his buddy stood in line for about 90 minutes. They are both between college and internships, bumming, nearly penniless. They had a great time with the crowd in the line. When my son pointed out the economic issues you guys mention here, that was laughed off. Some people were there for the pound of flesh, figuratively speaking. For some, like my son, the apology was nothing to getting something real for 23 cents.

For Papa John's, the publicity of the event had to outweigh the costs of cheap pizza. They had people in the door who never would have gone in otherwise and may have (not in my son's case; he grew up on homemade pizza) impressed people with a quality product. Still, as you guys imply, the invisible hand seems to have made a rude gesture at us all, in this case.

Which probably beats the
rude gesture Congress made to the invisible hand last week. I find it easier to forgive the guy on the street for knowing little to nothing about economics. Our Congress nothing so little on the topic is much more exasperating.

John, this is a great post! But let me say that Kate is certainly right about one thing: Papa John's got a big bang for their publicity buck with this stunt. I heard about this all the way out here in California. I did not hear about the lines . . . but anticipated them when I noted the line outside of our Baskin & Robbins ice cream shop last week. They had cones going for .31 a scoop--the proceeds of which went to help a firefighters fund. The mom who organized a troop of us to go and get this offering is . . . a doctor. I didn't wait in line (we had to be somewhere else and don't need the ice cream anyway) but I'll bet my time is a lot closer to being worth only $4 an hour than hers is!

As someone who worked in the Ashland store that dismal day, I can honestly say that this was no p.r. stunt and that lots of money was lost by Papa Johns (somewhere to the tune of a million dollars). All the money collected that day went to charity.

Thank goodness the world is blessed with the anti-elitist academics at NoLeftTurns to tell us how foolish people were for waiting in line a couple hours for their cheap pizza AND to share the major revelation that time can be translated into money.

There are some holes in that line of thought being applied here, though. Few people actually live their lives as if they were "on the clock" every waking moment. If someone's after-work (yes, some of these customers might have jobs, albeit perhaps jobs that pay the absurdly excessive $7/hr. minimum you menioned), leisure-time options involve depressing news and lackluster television (e.g., they've seen Bauer torture enough people on "24") and a full-price pizza delivered for $12 or a bit of a wait for a 23-cent pie, while they chat on their mobile, send instant messages, play video games or surf the net (depending on one's pocket-sized technology) or maybe even just get out of the house, get some air, and possibly strike up a friendly conversation with other line-holders then have they really worked for sub-minimum wage? Not every single human act can be, or should be, converted into a per-hour wage framework.

Or, as Kate's example demonstrated, some people might not be actively searching for employment but their pocket-money situation goes well with pizza for less than a quarter. Or someone was just returning from the post office to send off their 50 resumes (anything under 50/day indicates sloth!) that day and saw the commotion at the pizza joint. People might also take satisfaction in taking advantage of a great offer coming from a company which they would otherwise have no dealings with, over a slight they couldn't care less about.

But yeah, I doubt Ayn Rand would've stood in such a line - which, if she were still with us, could make the line that much more attractive to some of us.

I suppose I should clarify further, it was a p.r. move, to be sure, but a p.r. move that was to show that there exists no corporate allegiance to the anti-Lebron antics of the D.C. area franchisee. The company generated so much negative publicity based on the infamous t-shirt incident that it felt the only way back into the good graces of the public was to have some sort of massive public display of affection for greater Cleveland area basketball (and pizza) fans.

Thank you, Craig. Whatever might be said about you, you're clearly not an elitist.

pizza is tasty

It was irrational for me to spend my four and half minutes reading all this, and who knows how long I will waste composing this comment, but apparently I'm in good (if irrational) company. I have had no noble 23-cent pizza to eat for doing so, but I will at least fondly remember, until I someday forget it, that Kate makes great pizza and is damn proud of it, and that her son and other Ohioans know how to have fun in a line with strangers.

John Moser wonders: "Will someone please explain to me, then, why the minimum wage in Ohio is $7.00?"

You really wanna know why? I'll tell you why. It's because people like John Moser get very ticked off when a conservative utters certain words, like "macaca," and as a result they vote for Democrats, who love to raise the minimum wage to please one of their many Marxist special-interest groups.

That's why the minimum wage is $7.00. Next question...

Mr. Lamb, you don't know John Moser, do you?

Thank you, again, Carl Scott. For some of us, pizza is an art form, not just food stuff. My kids say I have spoiled their palates.

Paul Weaver, we did understand what Papa John's was doing. Papa John's did not lose millions if they make it up in later revenues. How much do they spend on advertising campaigns? This was very good advertising.

Actually there is a good micro-economic reason to get rid of the minimum wage from the "right"(in parenthesis because it is orthodox micro-economics on the left or right), Dr. Mosier knows what the argument is...basically that it creates a price floor. Now what is not known for certain is that at this particular time the minimum wage is actually a horrible thing. In other words it may be the case that the going rate of labor is above the minimum wage. In many cases where equilibrium is above the minimum wage a higher wage is paid, in Dublin OH that is better off Papa John's probably pays around $9/hour.

But can we say that in all cases where the minimum wage is the prevaling wage the equilibrium is not above minimum wage? Yes we can say this because it is integral to how it is measured. In other words saying otherwise would be like asking if a tree falls in the woods...

Nevertheless it is good contrarian and orthodox managerial economics to consider at least the possibility that the prevaling wage might be above equilibrium and yet the minimum wage might act to provide a disincentive to offering higher wages. It is not in the interest of firms to change prices if it will cause competitors to duplicate them. Subway brought out the cool jingle $5 footlong...but then Quizno's duplicated them. So what was good for Subway probably became bad for Subway. If you are in a market where none of your competitors are doing any advertising it might not be good to advertise for this very reason, If you are in a market where no one is paying workers above minimum wage then it might be bad to start doing so. Because when such things are raised the particular market starts to see an escalation...On guy goes 7.50 the next one puts it at 8.00 and before you know it the number is at 10.00 when it turns out that equilibrium was at 8.25...but the manager paying 10, can't simply go to his worker and tell him that the equilibrium is $8.25 I am sorry I will have to take back your raise. For this reason some businesses in some areas may from a managerial standpoint benefit from a minimum wage since this prevents overbidding. You can also contruct this argument in a game theory model...but the truth is that you would have to know entry costs, demand functions, cost could get complex and no one is paying me to do it.

In any case the minimum wage might actually serve with respect to firms to make a particular market oligopolistic, in such a market the hypothetical prevaling wage might be above the minimum wage but the minimum wage might act as a ceilling because no manager is so bold as to set off a bidding war.

For timid managers the minimum wage is a boon, and it is not crystal clear that low skill workers benefit from the creation of such oligopolistic conditions.

When I use such terms as "rational" I am not intending to piss off Craig. I am just discussing economics in its orthodox vocabulary. I also don't mean to offend Paul Weaver who I am sure makes an excellent Pie by calling him "low skill" labor. I am sure there are ways around such terms and that is why businesses spend big money on PR departments...but I find PR speak or PC speak to be insulting and confusion multipliers to put a spin on "force multipiers" as the Army might say or FoM to distinguish from FM which stands for Field Manual...but I think you get the point.

I can't imagine that much of anything will change as a result of this promotion. Our pizzas become less affordable every day for most people with every new year offering fewer specials and smaller coupon discounts. I would venture to say 70% of the people that got pizzas on that day were not only not regulars but had not ordered pizzas from us for the last 4 years as their information was not in our computers.

Kate, it may well have been heavily advertised, but that's because this was treated as a P.R. crisis on the level that the company had never seen before. I believe in their haste to respond they didn't think through the possible bad service backlash which we're already seeing a flood of complaints from both at our store and throughout the franchise. They will not make this up in revenue. The entire event was subsidized by the company (time and a half labor, lunches for workers, the cost of the food, etc., to say nothing of the proceeds donated completely to charity). I'm not taking offense to this thread in any way, but more trying to show what an unprofitable mess it was.

The only place the company stands to make any money is by sueing the franchisee.

Paul Weaver, I would venture to say 70% of the people that got pizzas on that day were not only not regulars but had not ordered pizzas from us for the last 4 years as their information was not in our computers. That's a good thing! Businesses work hard to get new people in the door, and P.J. got A LOT of new people in the door. If half of those people come back again for pizza or, better yet, some percentage switch brand loyalty, that is a win for your company. That day might have been hard on your regulars, but everyone had to understand the strain on staff and service. The lines would have kept some people away, but those people will have noted where the store is, which is also valuable publicity.

Wait a few months before leaping to the conclusion that the company will suffer from this. See what happens. If this improves market share through brand recognition, your job is secure.

Paul, I agree with you completly and understand fully what Kate is saying as well. I believe that both arguments are compatible. For the company as a whole I think it was good. For Papa John's in Ashland it may well have been bad. It is a hard and complex argument to make and I don't know what you need to make it work from a legal standpoint but I can do the economics for you guys. I have about 2 different models I could make your case with using firm and established Managerial Economic principles.

In simplest form I am going to use Kates argument which is also established to demonstrate that your store bore the brunt of the cost while other stores outside Ohio bennefited from the news which went all the way to California as Julie reminds us. While all Papa John's in the United States may benefit...and those in Ohio bennefit more on Kate's argument, we are going to go in and attempt to quantify the bennefit as any wise manager employing Managerial Economics would do. Then we are going to quantify the discontent of the regular customers who had to wait...folks like Dr. Mosier...and show that in truth it was not that great of a bennefit to your particular store given the non brand loyalty of low income college students as a demographic, we can chart this as elasticity of demand. Basically we will show that your particular store bore the brunt of an advertising campaign that did not bennefit all stores equally. I don't know about the legality but I don't think the economic argument will be disputed. It sounds like a clear cut case of free-riding on the part of the Chain.

I am not a lawyer but I could also use a model that is discussed in Supercrunchers by Ian Ayres who is a law prof at Yale...

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