Single Package Size as a Signal of Quality: Theory and Evidence

Abstract:     
This paper presents a theory of quality signaling based on the number and magnitude of package size(s) produced by a manufacturer of consumer-packaged goods. A high-quality type firm forgoes the profit from second-degree price discrimination inherent in selling two package sizes with a quantity discount. When there are many quality-sensitive consumers in the market, a high-type firm can signal its superior quality to such uncertain consumers by producing one size only and, additionally, by reducing the magnitude of its single package size. This increases the opportunity costs of mimicry by the low-quality type firm. In addition, a single, small package size alone signals quality when there are relatively few quality-sensitive consumers. However, package size supplements price as a signal of quality when there are many quality-sensitive consumers in the market. Moreover, producing a single, small package size allows a firm to target quality-sensitive consumers. Finally, this paper presents experimental evidence that reducing the number and magnitude of package size(s) raises consumers’ perception of product quality.

Number of Pages in PDF File: 39

Keywords: package size, quality, signaling, targeting

JEL Classification: L15, M31

working papers series