Quantity-Discount-Dependent Consumer Preferences and Competitive Nonlinear Pricing

Abstract

Producers of consumer packaged goods often offer several package sizes of the same product and charge a lower unit price for a larger size. In this article, the authors investigate the “quantity-discount effect,” or the phenomenon that consumers derive transaction utility from the unit price difference between a small and a large package size of the same product. The authors propose a modeling framework composed of a demand-side model and a supply-side model. The empirical results suggest that quantity-discount-induced gains or losses have a significant impact on consumer buying behavior. The authors also find a substantial amount of structural heterogeneity; that is, some consumers perceive quantity discounts as gains, whereas others perceive quantity discounts as losses. Conversely, the supply-side analysis suggests that manufacturers in the empirical application do not consider quantity-discount effects when setting prices. Through a series of policy experiments, the authors show that by accounting for quantity-discount-dependent consumer preferences, manufacturers can design more effective nonlinear pricing schemes and obtain greater profits.