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Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period

Author

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  • Satoshi Imai

    (Statistics Bureau of Japan)

  • Tsutomu Watanabe

    (University of Tokyo)

Abstract

Consumer price inflation in Japan has been below zero since the mid-1990s. Given this, it is difficult for firms to raise product prices in response to an increase in marginal costs. One pricing strategy firms have taken in this situation is to reduce the size or the weight of a product while leaving the price more or less unchanged, thereby raising the effective price. In this paper, we empirically examine the extent to which product downsizing occurred in Japan as well as the effects of product downsizing on prices and quantities sold. Using scanner data on prices and quantities for all products sold at about 200 supermarkets over the last ten years, we find that about one third of product replacements that occurred in our sample period were accompanied by a size/weight reduction. The number of product replacements with downsizing has been particularly high since 2007. We also find that prices, on average, did not change much at the time of product replacement, even if a product replacement was accompanied by product downsizing, resulting in an effective price increase. However, comparing the magnitudes of product downsizings, our results indicate that prices declined more for product replacements that involved a larger decline in size or weight. Finally, we show that the quantities sold decline with product downsizing, and that the responsiveness of quantity purchased to size/weight changes is almost the same as the price elasticity, indicating that consumers are as sensitive to size/weight changes as they are to price changes. This implies that quality adjustments based on per-unit prices, which are widely used by statistical agencies in countries around the world, may be an appropriate way to deal with product downsizing.

Suggested Citation

  • Satoshi Imai & Tsutomu Watanabe, 2013. "Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period," UTokyo Price Project Working Paper Series 008, University of Tokyo, Graduate School of Economics, revised Jun 2013.
    • Handle: RePEc:upd:utppwp:008
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    References listed on IDEAS

    as
    1. Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Bar-Ilan University, Department of Economics.
    2. Balk,Bert M., 2012. "Price and Quantity Index Numbers," Cambridge Books, Cambridge University Press, number 9781107404960, November.
    3. Kevin J. Fox & Daniel Melser, 2014. "Non-Linear Pricing and Price Indexes: Evidence and Implications from Scanner Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(2), pages 261-278, June.
    4. IMAI Satoshi & SHIMIZU Chihiro & WATANABE Tsutomu, 2012. "How Fast Are Prices in Japan Falling?," Discussion papers 12075, Research Institute of Economy, Trade and Industry (RIETI).
    5. Satoshi Imai & Chihiro Shimizu & Tsutomu Watanabe, 2012. "How Fast Are Prices in Japan Falling?," UTokyo Price Project Working Paper Series 001, University of Tokyo, Graduate School of Economics, revised Oct 2012.
    6. Satoshi Imai & Chihiro Shimizu & Tsutomu Watanabe, 2012. "How Fast Are Prices in Japan Falling?," CARF F-Series CARF-F-298, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
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    Cited by:

    1. Jordan Melmiès, 2017. "Industrial Seigniorage: The Other Face of Competition," Review of Radical Political Economics, Union for Radical Political Economics, vol. 49(2), pages 286-302, June.

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