Consumers' preference for downsizing over package price increases

Abstract

In this paper, I study how and why consumers react differently to package downsizing and package price increases that result in the same degree of unit price increases. Utilizing differential responses of South Korean milk manufacturers to the production cost rise in 2018, I first show that consumers strongly prefer downsizing to package price increases, and this tendency does not diminish over time. Then, I develop a theoretical model whose prediction is consistent with the empirical findings, providing a simple but novel explanation of why fully informed consumers would be less sensitive to downsizing than package price increases.