Left-Digit Bias, Shrinkflation, and Channel Coordination

38 Pages Posted: 25 Feb 2025

See all articles by Xuefeng Peng

Xuefeng Peng

The University of Hong Kong - Faculty of Business and Economics

Zemin (Zachary) Zhong

University of Toronto, Rotman School of Management

Date Written: February 25, 2025

Abstract

Left-digit bias to prices has been widely documented. This paper investigates how this bias shapes the firm's strategic quality and pricing decisions. We find that the bias drives shrinkflation, in which firms decrease quality while maintaining constant prices in response to cost shocks, instead of changing both quality and price. In channels, we show that the bias can either exacerbate the double marginalization problem or, due to retailers' rigidity in 99-ending prices, force manufacturers to lower the wholesale price and improve channel coordination. For welfare, the bias can sometimes enhance both consumer surplus and firm profit in centralized channels, or both consumer surplus and channel profits in decentralized channels.

Keywords: Left-digit Bias, Behavioral Pricing, Shrinkflation, Channel Coordination

JEL Classification: D91, L11, M31

Suggested Citation

Peng, Xuefeng and Zhong, Zemin (Zachary), Left-Digit Bias, Shrinkflation, and Channel Coordination (February 25, 2025). Available at SSRN: https://ssrn.com/abstract=5153921 or http://dx.doi.org/10.2139/ssrn.5153921

Xuefeng Peng

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Zemin (Zachary) Zhong (Contact Author)

University of Toronto, Rotman School of Management ( email )

105 St. George St.
Rotman School of Management
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://zacharyzhong.com

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