I recently read an instructive post about greedflation and whether or not it actually exists, and to what extent. There were a lot of good arguments in that post, but none of them brought in "shrinkflation" as a form of inflation. My question is:
Is shrinkflation a corruptive form of inflation?
The way I've reasoned out shrinkflation is as follows:
A company lowers their operating costs by reducing their product size and increases their operating profit by charging the same amount as their former larger size. It seems to me the capital cost of reducing their packaging would soon be paid for by their larger profit on the smaller item, so there is only a short term capital outlay in the process of creating shrinkflation.
I am thinking, for example of mayonnaise. Mayonnaise jars are smaller than they were a few years ago, but the price did not change when the smaller size was introduced. This is happening on hundreds of products, so it's clear it's a benefit to these companies' bottom line or they wouldn't be doing it.
This activity has two streams of income. One is the increase in price for a smaller amount of product (after capital costs are paid off in the short term), and the other is the frequency of purchase by the consumer. I was formerly using 4 jars of mayonnaise in a year, but now I have to buy 5 because I'm buying less with each jar. This forces me to pay their profit (which has increased on a per jar basis) one more time per year.
It seems to me this is a form of corruption in profit taking because consumers have very limited choice in terms of who produces and distributes mayonnaise. When all the mayonnaise producers have completed this process, they have no choice at all.
Is my reasoning on this rational? Is this a form of inflation that is motivated only by profit, outside of typical market driven price setting?
Is "shrinkflation" a corrupt form of inflation? Does it occur outside typical market driven price setting?
byu/ukengram inAskEconomics
Posted by ukengram
2 Comments
shrinkflation is one of the easier things to account for and monitor in inflation indices. if companies use shrinkflation to increase profits and prices, that’s already being accounted for in these debates because of how the consumer price index is calculated. the harder things to account for are subjective quality changes.
if a new computer gets introduced that is 20% cheaper but has a 30% worse battery, accurately accounting for this in the CPI relies on knowing how much consumers value a 30% worse battery, which is a much harder question than knowing how much consumers value a 20 oz mayo jar vs a 10 oz mayo jar.
it’s also worth noting that the shrinkflation has to be tied specifically to the pandemic. the story would have to be something like “general increases in inflation and uncertainty make it harder for consumers to ascertain quality changes”, not “companies can increase profits by making worse products”, since that would be true pre- and post-pandemic.
a common story people try to tell with inflation and prices is that, if there’s a general uncertainty about costs, consumers might not search as hard and be less price sensitive. this might make it easier to increase prices. you could imagine a similar-ish story about quality changes, although i don’t think it’s quite as clean. it also doesn’t have a clean market power connection
– https://www.bls.gov/opub/btn/volume-12/measuring-shrinkflation-and-its-impact-on-inflation.htm
>The way I’ve reasoned out shrinkflation is as follows:
>A company lowers their operating costs by reducing their product size and increases their operating profit by charging the same amount as their former larger size.
If it merely and automatically increased their profit why were these greedy (which is not in dispute) companies not already selling the smaller packaging?
>Is this a form of inflation
Yes it is a special case of inflation. As cost rise from a previous equilibrium a firm faces the choice of raising their price or losing money. They can raise the real per unit price by keeping the package the same and actually raising the price, or changing the package such they are selling less at the same price.
The only real “economic” difficulty in this decision is if, generally for some short period of time, consumers are fooled by the new package and think they are getting the same amount. They may buy more than would be optimal for themselves at this new higher unit price.