RESEARCH IN PROGRESS

The Psychology of Rates (w/ J. Gourville)

As the cost of goods increase, manufacturers and retailers routinely pass these costs onto consumers. Usually, this has meant a straight price increase a gallon of milk that costs $1.99 one year may cost $2.49 the next. A less obvious, but increasingly common, strategy is to downsize to maintain the sticker price, but to reduce the size of the product. Thus, a can of coffee shrinks from 1 pound to 13 ounces over time, while potato chips that cost $2.99 for 16 ounces one month costs $2.99 for 14 ounces the next. Our research addresses why and when strategies will be effective.

To explain the (possible) effectiveness of downsizing, we propose that for many transactions, consumers categorically evaluate the quantity purchased. For instance, they evaluate the price of cereal per box, the price of bread per loaf, and the price of coffee per container. As a result, they are quite sensitive to price, but much less exacting when it comes to quantity contained within a box or a loaf.

From the perspective of the manufacturer, we find support for this contention. In one study, using price and quantity data for four brands of breakfast cereal in a northeast supermarket, we find that variance in quantity (measured in ounces or servings) was 2 to 4 times greater than variance in price. In a second study, using longitudinal data from a large snack food provider, we find a systematic strategy by the manufacturer to periodically reduce quantity in lieu of increasing price. Both studies indicate that manufacturers view consumers as more sensitive to price than quantity.

At the level of the consumer, we also find support for this differential sensitivity. In one study, we find that consumers believe that downsizing will increase sales relative to a price increase because the former makes products seem cheaper. In a second study, designed to test our argument for categorical processing, we presented subjects with a request to pledge money to a walkathon. We varied the length of the walkathon (10 vs. 25 miles) and whether the request was framed as a per-mile donation or a total donation. We found that pledges in the total donation condition were insensitive to the length of the walkathon (at about $8) and that pledges in the per mile condition also were insensitive to length (at about 60¢ per mile). But insensitivity in the latter condition meant that the aggregate pledge for these subjects was more than 2 times greater at 25 miles than at 10 miles. It appears that individuals have a strong concept of a fair total donation and a fair per-mile donation, but are insensitive to the quantity (i.e., miles) over which that donation is allocated.

We continue to explore reasons behind this differential sensitivity to price over quantity. Potential explanations include a lack of awareness (e.g., I didn't realize that there was a quantity decrease), a lack of a mathematical ability (e.g., a 5% price increase is thought to be bigger than a 5% quantity decrease), and our proposed categorical evaluation of the quantity purchased.