Retail pass‐through of package downsizing

Abstract

Abstract The package downsizing strategy allows a manufacturer to raise unit prices while maintaining package prices in a range acceptable to consumers. The success of the strategy depends on the retailers' ability to transmit the cost of downsized products into consumer prices at higher rates compared to transmitting equivalent increases in the cost of nondownsized products. In this article, we test this hypothesis by empirically analyzing the retailers' pass‐through behavior in response to downsizing. Using data on ice cream purchases, our main finding is that downsizing is significantly associated with the price pass‐through. On average, downsized products' pass‐through rate is 8.4 percentage points higher than the rate for nondownsized products. An important implication of this result is that in competitive environments in which manufacturers prefer to avoid substantial increases in package prices, downsizing could be a win–win strategy for manufacturers and retailers in response to increasing production costs. [EconLit Citations M31, D12, D4].

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