Quantity Surcharge and Consumer Heterogeneity

This paper studies quantity surcharge and heterogeneity in consumer attention, using scanner data in the peanut butter category. Quantity surcharge exists for packaged goods when a smaller package size is cheaper than its larger size counterpart per unit. Quantity surcharges are frequent in the data, and households have heterogeneous purchasing behavior during quantity surcharge weeks: attentive households purchase multiple smaller jars, but inattentive households choose an inferior option of buying larger jars. However, no existing demand model can accommodate the inattentive type’s purchasing behavior. Hence, I develop a dynamic demand model that features heterogeneity in consumer attention and multiple-jar purchases. I assume four household types: attentive non-storer, inattentive non-storer, attentive storer, and inattentive storer. The demand model departs from the standard single discrete choice model in two ways: 1) it separates purchase quantity and package size choice and 2) it considers consumption quantity as a countable variable. I identify household types using the method of kmeans and estimate the parameters using maximum likelihood. The estimation results show that storer type households are more price sensitive than non-storer type households, and between the two types of storer households, attentive storers are more price sensitive than inattentive storers. *I am grateful to Jason Blevins, Maryam Saeedi, Bruce Weinberg, and especially Javier Donna for their guidance and support. I would like to thank JP Dubé and seminar participants at the Ohio State University Micro Brown Bag for helpful comments. I would also like to thank SymphonyIRI Group, Inc. for making the data available. All estimates and analyses in this paper, based on data provided by SymphonyIRI Group, Inc. are by the author and not by SymphonyIRI Group, Inc. Any errors are my own. Contact information: [email protected]