Left-Digit Bias, Shrinkflation, and Channel Coordination

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