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Shrinking Goods

By Daniel Levy and Avichai Snir

Abstract

If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices don't change. We study a situation where producers adjust the quantity per package rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information.

Topics: E31 - Price Level; Inflation; Deflation, L11 - Production, Pricing, and Market Structure; Size Distribution of Firms, L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices, L42 - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
Year: 2013
DOI identifier: 10.2139/ssrn.2249768
OAI identifier: oai:mpra.ub.uni-muenchen.de:46040

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