Consumer uncertainty and pack size

Abstract

Packaging is among the most visible features of modern day marketing. Goods which once used to be sold without any packaging such as fruits, vegetables, cereals and milk are now very likely to be sold in packs of fixed sizes. This is true for developed and emerging economies. In this paper we investigate the effect of uncertainty in consumption on pricing of pack sizes. We emphasize the role of uncertainty in consumption as the main issue driving the choice of pack sizes and their pricing. A typical consumer facing a purchase decision does not usually know how much she will later consume. The purchase decision precedes consumption. Buying too much could lead to a large stock of unconsumed goods. This would either have to be consumed later with possibly reduced levels of satisfaction. It would certainly occupy scarce shelf space. We will include both these effects under the common term of storage costs. Buying too little could lead to facing the prospect of having to do without or another trip to the store. Consumers, also differ in the type of uncertainty they face. The producer can then design pack sizes and their corresponding prices to discriminate across consumers and maximize profits.