Estimating Consumer Response to Package Downsizing: an Application to Chicago Ice Cream Market

We estimate a random utility model of demand to measure consumer response to package downsizing in consumer goods markets. To our knowledge this paper provides the first estimates of consumer response to package size. We perform the analysis using Nielsen Homescan data on bulk ice cream purchases of a panel of households in Chicago, between 1998 and 2007. The estimation framework involves modeling household heterogeneity, addressing price endogeneity and dealing with unbalanced choice alternatives. We adapt a Bayesian approach for estimation. The main finding is that consumers are less responsive to package size than to package price; the demand elasticity with respect to package size is approximately one-fourth the magnitude of the demand elasticity with respect to price. This result implies that manufacturers can use downsizing as a hidden price increase in order to pass through increases in production costs, i.e. cost of raw materials, and maintain, or increase, their profits.