Why Do Hot Dogs Come in Packs of 10 and Buns in 8s or 12s? A Demand-Side Investigation
This paper presents a theory that yields insight into the determination of package prices and sizes. Consumer heterogeneity in consumption rates, storage costs, and transactions costs (costs of making trips to the store) explains differences in package sizes and unit prices. In the model, fully-informed consumers and a monopolist seller pursue optimizing behavior. The seller chooses package sizes and prices to maximize profits, and the consumers select package sizes that maximize their utilities. The authors show that consumer heterogeneity may induce the seller to offer more than one size and that larger sizes would be sold either at unit-price discounts or unit-price premiums. Welfare implications and empirical tests of the theory are presented. Copyright 1987 by the University of Chicago.