Archive for September, 2015

Sep 01 2015

The secret to succeeding in a competitive market? Know thine determinants of demand!

I love croissants (or “gipfeli” as they are known here in Switzerland). I also love using bakeries as examples of businesses operating in competitive industries when teaching the concepts of perfect competition in my Theory of the Firm unit. So I was thrilled to see this article from the Economist this week called Croissantonomics.

The nature of competition in the market for baked goods in New York City is clearly intense, as the baker featured in the article implies.

In all, it costs Mr Rubin $2.60 to make a $3.50 croissant. If he makes 100 and sells 70, he earns $245 but his costs are $260. Since he refuses to sell leftovers—all goods are sold within a day—he loses money. “Welcome to the bakery business,” Mr Rubin says

The article outlines the secret to success in this competitive market.

First, product differentiation“his best creations are distinctly American: pretzel croissants (surprisingly tasty), and recipes for making money.”

Second, know the determinants of demand for your product:

There are no brownies or carrot cake on Mondays or Tuesdays—people don’t buy rich desserts after decadent weekends. He watches the weather closely, as demand melts in the rain. He keeps an eye on school calendars, to bake less when children are away. He bakes more after the fasting of Yom Kippur, when demand from Jewish customers picks up.

The article provides an excellent example of how important it is for a producer of a good in a competitive market must be intimately familiar with his consumers in order to succeed. Markets are most efficient when perfect information and knowledge of the desires of consumers is communicated to producers, but in many markets there is information asymmetry, meaning that the sellers do not know what consumers truly want and are therefore unable to bring to market those goods and services that are most in demand.

Mr. Rubin’s bakery has discovered the secret to success in a competitive market: Know thine determinants of demand and make sure you only produce precisely what it is consumers want, and do so at the least possible cost in order to eliminate waste. In this way, Economic Darwinism assures the survival of the most efficient. 

Such strategies have helped the City Bakery survive since 1990. It now has seven smaller shops in New York and seven outposts in Japan, with plans to open in Dubai.

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