Non-linear pricing and price indexes: evidence and implications from scanner data

Non-linear pricing, the fact that prices do not necessarily change in proportion to size, is a ubiquitous phenomenon. However, it has been neither particularly well understood nor well measured. Non-linear pricing is of practical importance for statistical agencies who, in constructing price indexes, are often required to compare the relative price of a product-variety of two different sizes. It is usually assumed that prices change one-for-one with package and pack size (e.g. a 1-liter cola costs half as much as a 2-liter bottle). We question the wisdom of such an assumption and outline a model to flexibly estimate the price-size function. Applying our model to a large U.S. scanner dataset for carbonated beverages, at a disaggregated level, we find very significant discounts for larger-sized products. This highlights the need to pursue methods such as those advocated in this paper.