Bagels and donuts for sale: A case study in profit maximization

Profit maximizing behavior on the part of firms is a fundamental, but rarely tested, assumption of economics. In this paper, I analyze the decisions made by an MIT trained economist running a company that delivers bagels and donuts. The simplicity and transparency of the business (e.g. marginal cost is easily observed) allow for relatively direct tests of profit maximization in the quantities delivered each day and the prices that are charged. Using twelve years of data representing more than 80,000 deliveries, I find that the company is extremely adept and determining how many bagels and donuts to deliver to a particular customer on a given day. The company appears to price on the inelastic portion of the short-run demand curve for the entire period. These pricing choices are inconsistent with short-run profit maximization, although they can potentially be reconciled with a dynamic optimization model.