Is it just me, or are the peaks on my bar of Toblerone chocolate growing conspicuously less numerous? Wait, hold on. I’m pretty sure that roll of Charmin toilet paper used to have 500 single-ply sheets. Now it has only 451. What’s going on here? This is known in the world of retail economics as “Shrinkflation.”
No, you are not going crazy, you are just getting less for the same price. The mindset of international retailers is to maintain sales without a hit to the bottom line. In the Toblerone example, as sterling tumbled, global firms selling to the British market faced the same production costs as before, but got less money for each sweet sold. Rather than raise the price per chocolate, some chose to shrink the chocolate per price.
Every first-year economics student quickly becomes familiar with charts of supply and demand, which place price on one axis and quantity on the other. However, perhaps our textbook economics lessons should be updated for the modern online retailing world. Enter big data. Online retailing, which makes it easier to collect fine-grained price data, reveals how poorly textbook models reflect real-world market dynamics. The prices of consumer goods, it turns out, behave oddly.
Academia has entered the fray with a position paper attempting to explain this phenomenon. Diego Aparicio and Roberto Rigobon of the Massachusetts Institute of Technology have made an analogy with subatomic particles, of course. The authors dub this phenomenon “quantum pricing,” as quantum mechanics grew from the observation that the properties of subatomic particles do not vary along a continuum, but rather fall into discrete states.” Before you stop reading this article, there is a simple point here. Companies are pricing their products in “Pricing slots,” that make financial sense for them.
You will notice that a company will sell multitudes of product at certain price points, like $4.99, $6.99, $12.99, etc. This is not for marketing, but given a big enough shift in market conditions, such as an increase in labor costs, firms often redesign a product to fit the price rather than tweak the price. They may make a production process less labor-intensive, or shave a bit off a chocolate bar.
Let’s look at inflation for a moment, or rather the lack thereof. Central banks are starting to see the consequences of what our friends at MIT are talking about. Inflation does not respond to economic conditions as much as it used to. The fact that we have stayed in a low-inflationary environment for so long, below the Federal Reserve’s target rate of 2%, lends credence to quantum pricing. Since most of us don’t even know what quantum means, we will nod our heads in acceptance of such theory.
So perhaps there is more to the picture than meets the eye. Trump and Wall Street applaud a low interest rate-low inflationary environment. However, the practice of tweaking quality in lieu of price could play havoc with essential economic data. As such, central banks watching for big swings in inflation or wage growth as a sign of trouble could be reacting to figures that bear far less relation to business conditions than they used to.