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Package Size Decisions

Author

Listed:
  • Oded Koenigsberg

    (Graduate School of Business, Columbia University, New York, New York 10027)

  • Rajeev Kohli

    (Graduate School of Business, Columbia University, New York, New York 10027)

  • Ricardo Montoya

    (Department of Industrial Engineering, University of Chile, Av. República 701, Santiago, Chile)

Abstract

We describe a model examining how a firm might choose the package size and price for a product that deteriorates over time. Our model considers four factors: (1) the usable life of the product, (2) the rates at which consumers use the product, (3) the relation between package size and the variable cost of the product, and (4) the minimum quantities consumers seek to consume for each dollar they spend (we call these reservation quantities). We allow heterogeneity in the usage rates and reservation quantities for the consumers. We show that when the cost increases as a linear or convex function of the package size, the firm should make packages of the smallest possible size. Smaller packages reduce waste and allow consumers to more closely match their purchases with desired consumption. This in turn allows the firm to charge a higher unit price and also sell more unit volume. The results imply that in a market with multiple package sizes (produced by the same or competing firms), at least one of the packages must have the smallest possible size, provided the fixed cost of making the product is sufficiently low. For concave cost functions, the firm may find it optimal to make larger than smallest-size packages.

Suggested Citation

  • Oded Koenigsberg & Rajeev Kohli & Ricardo Montoya, 2010. "Package Size Decisions," Management Science, INFORMS, vol. 56(3), pages 485-494, March.
    • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:3:p:485-494
    DOI: 10.1287/mnsc.1090.1119
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    References listed on IDEAS

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    1. Gerstner, Eitan & Hess, James D, 1987. "Why Do Hot Dogs Come in Packs of 10 and Buns in 8s or 12s? A Demand-Side Investigation," The Journal of Business, University of Chicago Press, vol. 60(4), pages 491-517, October.
    2. Cohen, Andrew, 2008. "Package size and price discrimination in the paper towel market," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 502-516, March.
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    Cited by:

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    2. Shubhranshu Singh, 2017. "Competition in Corruptible Markets," Marketing Science, INFORMS, vol. 36(3), pages 361-381, May.
    3. Ludovic Stourm & Raghuram Iyengar & Eric T. Bradlow, 2020. "A Flexible Demand Model for Complements Using Household Production Theory," Marketing Science, INFORMS, vol. 39(4), pages 763-787, July.
    4. Yonezawa, Koichi & Richards, Timothy J., 2016. "Competitive Package Size Decisions," Journal of Retailing, Elsevier, vol. 92(4), pages 445-469.
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    10. Gadi Fibich & Roy Klein & Oded Koenigsberg & Eitan Muller, 2017. "Optimal Three-Part Tariff Plans," Operations Research, INFORMS, vol. 65(5), pages 1177-1189, October.

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