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Wednesday, January 5, 2011

A reason for sticky prices

Menu costs, yadadada.  I've always thought that was a rather weak explanation for sticky prices.  I think a better one, and one that I don't think has been researched much (anyone know of anything?) is the private industry decision to cut product size and keep price roughly the same.

How many of you, when you go grocery shopping, check the prices of the things you buy?  I bet about 100% of you 100% of the time.  How many of you, on those same trips to the store, check the size/volume of the things you buy?  I bet roughly none of you.  I know I don't usually unless it's glaring.  

All a company has to do is reshape a plastic mold here or resize a box there and voila, instant  volume reduction.  And due to the asymmetric information whereby the company knows what is changed and the consumer doesn't, huge inefficiencies are created - goods are purchased out of habit and the reduction in the amount of product for the same price is missed by the consumer.  All this affords a company to gain roughly the same amount of revenue at a lower cost of production - which is great in down economic times.

13 comments:

Wesley said...

Hahah very interesting. Never thought of it this way... I'll be a bit more diligent in checking the volume/weight of my packaging from now on...

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