Final answer:
Pizzas at Home employed a promotional pricing strategy, which included free delivery and a 'free pizza if not delivered within 30 minutes' guarantee. They initially followed a penetration pricing approach, later factoring in production costs and desired profit to determine their new pricing strategy amidst the competitive pressures of a monopolistic market.
Step-by-step explanation:
The strategy followed by Pizzas at Home described in the scenario is an example of a promotional pricing strategy. Initially, the company used a penetration pricing approach by offering free delivery to attract customers and gain market share. When costs and competition increased, necessitating the introduction of a delivery fee, Pizzas at Home switched to a promotional strategy of guaranteeing free pizzas if not delivered within 30 minutes to differentiate itself and maintain its competitive edge. This approach is typical of monopolistic competition where firms have some market power due to differentiated products but still face competitive pressures.
Firms in monopolistic competition, such as pizza shops, choose their pricing by considering the cost of production and their desired profit margin. The cost of production includes raw materials like dough and cheese, capital costs like pizza ovens, and operating expenses such as shop rent and workers' wages. The desired profit margin reflects the firm's goal for profitability, taking into account the competitive environment. The balance between these factors determines the pricing strategy that will maximize profits without alienating customers, aiming to strike a balance between affordability and profitability. In the competitive pizza delivery market, companies like Pizzas at Home need to adapt their strategies to changes in costs, like the price of gasoline for delivery vehicles, as well as to consumer expectations and competitor moves. This dynamic environment requires flexibility in pricing and promotional strategies to maximize profits and maintain a solid customer base.