Balagtas, Joseph Valdes

Binkley, James K.

Cakir, Metin

Leibtag, Ephraim S.

English

Research Papers in Economics

The Economics of Reducing Package Size: 
Consumer response and returns to manufacturers 
 
 
Metin Cakir 
Department of Agricultural Economics, Purdue University 
West Lafayette, IN 
mcakir@purdue.edu 
 
Joseph V. Balagtas 
Department of Agricultural Economics, Purdue University 
West Lafayette, IN 
balagtas@purdue.edu 
 
James Binkley 
Department of Agricultural Economics, Purdue University 
West Lafayette, IN 
jbinkley@purdue.edu 
 
Ephraim Leibtag* 
ERS, USDA 
Washington, DC 
eleibtag@ers.usda.gov 
 
 
 
 
 
 
 
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association 2010 
AAEA,CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 2010 
 
 
 
 
 
 
 
Copyright 2010 by Metin Cakir, Joseph V. Balagtas, James Binkley and Ephraim Leibtag. 
All rights reserved. Readers may make verbatim copies of this document for non-commercial 
purposes by any means, provided that this copyright notice appears on all such copies. 
* The views expressed in this paper are those of the authors and do not necessarily reflect those of the United States 
Department of Agriculture. Average National Shares of Major 
Brands Between 1998-2007
Brands Size Share
Top 4 0.342
Top 10 0.572
Top 20 0.707
Ben & Jerry Pint 0.043
Haagen Dazs Pint 0.041
Blue Bell Pint 0.016
Dreyer's/Edys Pint 0.016
Breyers Half Gallon 0.164
Dreyer's/Edys Half Gallon 0.156
Kroger Half Gallon 0.055
Turkey Hill Half Gallon 0.039
Blue Bell Half Gallon 0.037
Wells Blue Bunny Half Gallon 0.032
Safeway Half Gallon 0.026
Publix Half Gallon 0.019
Friendly Half Gallon 0.017
Dean's Half Gallon 0.012
Wal Mart Half Gallon 0.011
Mayfield Half Gallon 0.010
The Economics of Reducing Package Size: 
Consumer Response and Returns to Manufacturers
Metin Cakir, Joseph V. Balagtas, James Binkley, Ephraim Leibtag
Introduction
•Reducing package size, or package downsizing, is a widely used 
strategy among manufacturers of consumers goods.
•However, downsizing as a strategic tool has not been analyzed 
previously and its causes and economic implications are unknown. 
•A manufacturer may choose downsizing to
•effectively raise the unit price of the good as a response to 
an increase in input price.
•differentiate its product, i.e. targeting consumers who 
prefer products in smaller packaged products.
•Objective: To provide empirical evidence on the economic reasons 
and consequences of downsizing.
•Data: We use a panel of household purchase data on the ice cream 
category compiled by Nielsen Homescan.
•Method: Specify and estimate an equilibrium model of differentiated 
product markets which accounts for competition in both prices and 
package size.
Research Questions
•Why do  (some) manufacturers downsize?
•What are the effects of downsizing on market shares and mark-up?
•Do consumers have differential sensitivity to changes in unit price 
and package size?
•Do demographics matter in consumers response to downsizing?
Contribution to the Literature
•First to analyze reducing package size as a strategic tool
•First to estimate a random coefficient logit model with endogenous 
product characteristics using a Bayesian estimation approach
The Data
• We use a panel data consists of detailed purchases of household 
over 1998-2007 in 52 major cities. 
• Information is available on:
• Purchase price and quantity of products.
• Product characteristics: Variety, package size &promotion.
• Demographics: Income, employment, education, race, 
martial status, household size and household composition
The Econometric Model
• Demand Side: A random coefficient logit model that incorporates 
both observed and unobserved consumer heterogeneity.
•The probability of person i choosing brand j in market t is: 
• sijt= exp(Vijt)/(1+∑kexp(Vijt)) where;
•Vijt=βi’xjt + ξjt
•xjt is the vector of observed product characteristics including price, 
package size, promotion, variety and brand fixed effects.
•ξjt is the unobserved product characteristics.
•βi = β0 + αdi + δvi, is individual level response coefficients.
•di is observed, vi is unobserved consumer heterogeneity.
•Supply Side: A two stage model of competition in order to 
characterize both short-run and medium-run decisions.
•1st stage: Firms choose product package size.
•2nd stage: Firms compete in prices.
•Retailers assumed to have constant mark-up pricing policy.
•Manufacturers assumed to be price-takers in input markets.
•The manufacturers cost structure is specified as:
•Cmr (sj(.), wj|rj, κj) = Csr (sj(.)|wj,rj, κj) + rjwj
•The profit maximization problem at each stage is given as:
•2nd stage: Maxp πf= ∑jєΘ(pjsj(p) - Csr (sj(p)|wj,rj, κj))
•1st stage:  Maxw πf= ∑jєΘ(p*
jsj(p*) - Csr (sj(p*)|wj,rj, κj) - rjwj)
• p is price, w is package size, p*, is the second stage optimal prices, 
κ is the other fixed cost prices and Θ is the set of products produced 
by manufacturer f.
•Estimation: We employ a Markov Chain Monte Carlo, MCMC, 
procedure to estimate demand equation together with the two first 
order conditions derived from supply side simultaneously.
The US Bulk Ice Cream Industry
•Typical of oligopolistic differentiated product markets marked by 
concentration and brand proliferation.
• In 2007, 250 manufacturers produced over 400 
brands.
• Top 3 manufacturers shared over 50% of the market.
•Downsizing is frequently observed, but not for all manufacturers.
•Downsizing may be used strategically.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Ice Cream Expenditure Shares by Size
128 oz.
48 oz.
32 oz.
160 oz.
16 oz.
64 oz.
56 oz.
Volume and Expenditure Shares of 
Leading Manufactures in the US Bulk 
Ice Cream Industry
Manufacturer 
Volume 
Share 
Expenditure 
Share 
Unilever  18.51 22.81
Nestle  17.09 22.16
Kroger  13.68 10.48
Wells Dairy 7.55 6.50
Blue Bell 4.56 5.95
Top 3  49.28 55.45
Top 6  64.73 70.67
Private Brands  25.79 20.04
Preliminary Evidence from Descriptive Analysis
•Downsizing effectively increases the unit price of the product.
•Household demographics matter in the choice of product.
•i.e. low income-education households prefer Wal Mart.
•i.e. small size households prefer Haagen Dazs.
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Edys Package Pr. in Atlanta
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Edys Price Per oz. in Atlanta
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Breyers Package Price in Atlanta
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Breyers Price Per oz. in Atlanta
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Preliminary Evidence from Regression Analysis
•Our preliminary results suggest that consumers are less 
responsive to changes in package size than to changes in price. 
This finding has important implications for competition in the ice 
cream category, welfare of consumers, and potentially 
population health and nutrition related to ice cream 
consumption.

The Economics of Reducing Package Size: Consumer response and returns to manufacturers.

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