1.Report the demographic and independent variables that are relevant to complete a demand analysis providing a rationale for the selection of the variables. (Independent variables are the variables that have effect on the demand of Pizza). List 5 and explain the effect of each of them on the demand of Domino’s Pizza. I currently reside in Allentown, Pennsylvania, which has a current population, based off of the 2010 Census data, of 118,032 people. The large amount of people that reside in the 18 square mile city, which is the third largest in the state, allows for huge competition amongst the local chain and privately owned pizza restaurants. Within the city limits of Allentown, Pennsylvania, there are 3 Domino’s pizza restaurants within 13.2 miles of each other. The average median income per household is $49,025 and $37,356 per family.
This can affect the demand of pizza based on the price of the pizzas being sold. The lower the income of a family is, the lesser the chances they will purchase take-out or fast food. Typically, families that are on a fixed or smaller income will live on a budget and normally that does not include the luxury of eating out. Looking at the price of various Domino’s Pizza, Pizza Hut and various local pizza restaurants, the average cost of a large, plain cheese pizza pie is $10.42. While this may be a good price to some, families with a higher number of members may not be willing to pay $10+ per pizza due to the fact that they most likely have to purchase in multiple quantities. 15 percent of the Allentown, Pennsylvania population get around by means of transportation other than a car, therefore a pizza restaurant offering delivery services will be a benefit to those not able to pick their pizza up.
The local average fee for pizza delivery is $2.00, based off of two of the large chain pizza restaurants delivery fees. The local privately owned pizza restaurants do not charge a delivery fee, which is a greater demand for those residents looking to spend the least amount of money on their pizza lunch or dinner. Many pizza restaurants offer various pizza order specials, such as 2 large plain pies for $19.99. While that is a great offer, the larger chain pizza restaurants such as Domino’s and Pizza Hut offer various specials like a large pizza for 8.00 or a large 3-topping pizza for $7.99. The only disadvantage of these specials is that the pizzas vary in their large size from restaurant to restaurant.
2.Find the price elasticity of demand for Pizza online. Is it elastic, unit elastic, or inelastic? Explain how the price elasticity of demand can affect your decision to open the pizza store and your pricing policies? Price elasticity of demand is defined as “the ratio of the percentage change in quantity demanded to the percentage change in price, assuming that all other factors influencing demand remain unchanged” (McGuigan, 2011, pg. 70). With the average cost of pizza in Allentown, Pennsylvania being $10.42, it is still a very high demand product. If the price of pizza were to go up, the demand for pizza may drop slightly, making the demand in price insensitive. There are certain determinants that will affect the price elasticity such as disposable income and the prices of competitors’ products these cannot be controlled by the firm. Determinants that can affect the price elasticity of pizza that can be controlled by the firm are price, advertising, product quality and customer service (McGuigan, 2011, p. 69).
The price elasticity demand for pizza is and will most likely always be inelastic, because even though the cost of the ingredients to make pizzas may increase and decrease, pizza is a very popular product and will always be in high demand. Being a part of the Domino’s Pizza franchise, offering the various weekly and monthly specials will guarantee that the demand for pizza will not decline by a huge rate should the need to increase pricing arises. This will not affect my decision to open a Domino’s Pizza franchise, I am confident that the demand for pizza will only slightly decrease if economic reasons forces pricing to rise. My pricing policies will always be in line with Domino’s corporate structure, therefore being able to offer special deals on pizzas will counter balance the rise on individual pizza pies.
3.Explain the cross price elasticity. List 3 goods that you consider substitute to pizza in your area. How do they affect your decisions? (opening the store and pricing policy) Cross price elasticity is defined as “the ratio of the percentage change in the quantity demanded of Good A to the percentage change in the price of Good B, assuming that all other factors influencing demand remain unchanged” (McGuigan et al, 2011, pg. 87). If the price of pizza’s rises and the demand decreases by a certain percentage then this causes the need for pizza boxes will decline. This will be considered a negative cross price elasticity, and the two goods are complementary.
On the other hand, if the price of pizza increases, and the demand for an alternative product increases, then this is considered substitutes, and the cross price elasticity is positive. Some substitutes for pizza in the event the price rises could be Subway sandwich platters, KFC family bucket meals, and Chinese food platters. Families buy pizza because of the large quantity for a cheap price, but if the prices were to increase, then these same families may look for similar alternatives that will not empty their wallets. These are possible alternatives that offer a large quantity of food at a reasonable price that can affect the demand of pizza. However, monitoring the costs of the competing fast food restaurants in the Allentown, Pennsylvania area will allow Domino’s to offer certain specials and pizza deals to the community that can keep their demand at a high rate.
4.Explain how you will forecast the demand for pizza in your community for the next four (4) months, using the regression equation including the assumptions that were used. Justify the assumptions made related to the forecast.
5.Based on the forecasting demand, price elasticity, and cross price elasticity discuss whether Dominos should establish a restaurant in your community. Provide a rationale and support for the decision. Establishing another Domino’s Pizza restaurant in the Allentown, Pennsylvania area will be a good idea because there is a true demand for pizzas. Referring to the price elasticity and the cross price elasticity, the positive outweighs the negative sides of supply and demand. Whether or not the price of pizzas goes up, the demand will always be sufficient enough to warrant the decision to open up a new restaurant.
The price elasticity is inelastic because if and when the price of pizza increases, the demand for it will not be greatly affected. Domino’s Pizza’s financials for first quarter 2013 were released and the pizza giant had revenues up 8.6% from Q1 2012, and their net income was up 65.9% for the same period in 2012 (Dominos.com, 2013). This proves that even during the decline in the economy, the demand for pizza stays at the top. Domino’s Pizza sells more than one million pizzas daily, it is safe to assume that opening a new Domino’s in the Allentown area will not be a bad decision.