Product Differentiation by Package Size

ABSTRACT Quantity surcharges exist when a larger‐sized package has a higher per‐unit price than its smaller‐sized counterpart. This article argues that quantity surcharges can be explained by the fact that different sizes of the same product are imperfect substitutes and thus are differentiated products. To test this hypothesis, we utilize grocery store scanner data to estimate a demand system and the associated cross‐price elasticities. We focus our empirical investigation on canned tuna, which often exhibits quantity surcharges. A random coefficients logit demand approach is used to calculate elasticities. There is evidence to support the hypothesis that quantity surcharges in canned tuna are driven by firms catering to heterogeneous consumer preferences.