Tuesday, August 24, 2010

Why do grocery store labels list unit price?

Whenever I go to the store, I'm overwhelmed by the pervasiveness of price discrimination. Slightly superior products that cost only a few cents extra to manufacture are sold for a dollar more; products cost twice as much as their competitors simply because they carry a brand name. The relationship between volume and unit price is inconsistent: on average products sold in bulk tend to be cheaper, but for individual product types this isn't always true.

Presumably the store's goal is to sort out the careful, price-sensitive shoppers—who pay attention to subtleties like unit price—from the careless customers who grab whatever looks good. But this should depend on making it difficult to compare products. If it's too easy, everyone will do it, and the benefits from charging inconsistent prices will evaporate. So why do labels tell me what the unit price is, making comparisons trivially easy? I don't even need to do division!

The answer isn't kind to the intelligence of the typical shopper. Apparently, in the absence of unit price labels, too few shoppers do the arithmetic to make this a viable price discrimination strategy. Most customers remain pooled in a single group, and the small minority that compares unit prices may be so good at cheap shopping that no store even wants to attract it.

With posted unit prices, on the other hand, a substantial fraction of shoppers is smart enough to make comparisons and select the cheapest item. Yet for price discrimination to make sense, a sizable chunk of shoppers must still be indifferent to unit price. Even when they see two identical goods sold in different volumes with a large disparity in unit price, they either don't pay attention or don't care.

This is particularly baffling when the low-volume good is cheaper (which happens more often than one would think). With certain perishable goods, or goods that many people need in only small quantities, you can imagine how shoppers might not want to pay for high-volume items with low unit price. But when the smaller volume is cheaper, this doesn't matter: the smaller volume gives you more freedom to select exactly the amount you want. In a few cases shoppers might still have a preference for the higher volume—if they really, really need 200 grams of some item and no more, they might prefer the 200 gram version to a significantly cheaper 150 gram version. Except for the most price-insensitive shoppers, however, I can't imagine this happening frequently enough to matter.

And that's the rub: in the end, the only way that this pricing strategy makes sense is if many shoppers are extremely bad at making low-level optimizations. I wonder about these people. Are they rich enough that it doesn't matter? Lazy (or especially adverse to spending a few extra seconds shopping)? Do they not realize why the numbers in small print matter? Or am I just a crazy economist who thinks about these issues when most people don't really care?

Edit: As Michael Webster points out in comments, there are unit pricing laws that vary at the state level. Apparently there is a very strong one in Massachusetts that requires both unit and item pricing -- and since this post was inspired by a trip through a Massachusetts grocery store, the unit price law is a pretty big omission on my part. Many of the observations in this post are still curious -- since I've made them in North Carolina too, where there are no unit price requirements -- but regulation surely explains a great deal.

6 comments:

michael webster said...

Unit pricing is used when there are different sized packages used by the retailer.

The unit pricing laws are at the state level, and not all states have such laws. I don't know why. Even in those states which have unit pricing, compliance varies widely.

Unit pricing is regulated by the state's weights and measures departments - the rationale for such regulations was to protect businesses from dishonest competition.

Dan said...

Unit pricing laws are a good point.

As for why many people ignore the unit price: like you said the unit price is printed smaller and when people are faced with two numbers that describe the same object I think a lot of them just ignore the one that is typed smaller.

I am a scientist and even in my field I have met many people who have trouble associating two numbers with one object...

Anonymous said...

Couldn't it be driven by competition among stores?

Sally said...

Hey Matt! Neat post. As a bargain-hunter, I've definitely shared your confusion from time to time. My gut says this phenomenon is largely a function of wealth, as you allude to near the end. We tend to think that price elasticities for most normal goods should be decreasing in wealth, so my guess is there's a wealth threshold at which cost minimization gives way to other powerful forces in consumer behavior, some of which you seem a little quick to cast aside.

First off, I think you may be downplaying the value of branding, especially when it comes to groceries. You seem to brush off branding as a simple guise for justifying price discrimination -- a signal of quality, perhaps. But for many consumers, I think brands have intrinsic value. They offer shoppers intangible yet important goods -- nostalgia, entertainment, identity. My mother will forever buy Clabber Girl baking powder, even though it costs twice as much as the store brand, because her mother bought Clabber Girl baking powder, and that makes her happy. I have to admit that I do the same-- even as a grad student on stipend. I am willing to pay extra money for that sense of connection with my family, just as parents are willing to pay more for brand name cereals because their kids like Toucan Sam. Companies obviously benefit from consumers having such strong emotional connections to their brands, but it's not as if anyone is being duped. Some consumers just don't see brand name and generic goods as homogeneous.

(On a side note: It might be interesting to study whether emotional attachment to food brands varies with gender, especially since women tend to do more shopping on behalf of families than men.)

Second, I think that implicit in your critique of consumers' grocery shopping strategies is the assumption that every consumer re-solves his or her optimization problem in response to changing prices every time s/he goes to the store. Consumers buy lots of things out of simple habit, and groceries are surely no exception. I think this is a really interesting growing edge of micro theory -- the notion that people make decisions about their optimal behavior at infrequent intervals and then derive heuristics to use in the intervening time. You may buy Vlassic pickles today simply because you decided two years ago that you like buying Vlassic pickles. This may be the lazy factor that you mentioned, but I think it's something more subtle than laziness, and it's definitely something that our profession will have to wrestle with in the years to come because it's probably a much more accurate depiction of the typical consumer's decision making process.

Wow. That ended up being a lot longer than I thought it would. Thoughts?

Matt Rognlie said...

Anonymous:

It's definitely possible, but since the existence of any price discrimination at all is premised on imperfect competition (otherwise stores would be charging the same prices for everything), this is really hard to interpret.

Sally:

Thanks for the comment. I agree that brands are often valuable in their own right, either for sentimental or practical reasons. Although I usually buy whatever brand is cheapest, I do make an exception for the store-brand diet cola, which seems to be a ripoff of Coke Zero rather than Diet Coke (Bad choice, guys!).

I think your point that reoptimization doesn't happen on every visit to the store is very important to understanding what goes on in these markets. Retail competition has always been very difficult for me to understand intuitively, because it's not clear when and how consumers are making their choices. At the end of the day, retailers have brutally low profit margins, and in a sense this can't be consistent with much market power. Yet the pattern of prices at the typical store is suggestive of really high market power -- all kinds of price discrimination, etc. This seems consistent with a model where consumers reoptimize their high-level choices between stores at a relatively low frequency, based on their general perception of how much the stores cost (which pushes the retailers closer to zero profit), but don't care much about optimizing the low-level decisions once they've made their choice of establishment.

Alan said...

The answer, with the wide spread use of scaners pricing labels are required in most states but only nineteen (19) states and two (2) territories have unit pricing laws or regulations in force. Eleven (11) of these have mandatory unit pricing provisions. They are: Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Oregon, Puerto Rico, Rhode Island, Vermont and the Virgin Islands.

The latest trick being used by grocery stock manufacturers is to downsize the package while keeping the price the same. This trick has made UNIT PRICING the PRIME Way of gaging the value of a purchace. As our economy slips lower and lower people in the US will have to learn to shop not by brand but by UNIT PRICE. Alan Maier alan.maier1@gmail.com