Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period

Consumer price inflation in Japan has been below zero since the mid-1990s. Given this, it is difficult for firms to raise product prices in response to an increase in marginal cost. One pricing strategy firms have taken in this situation is to reduce the size or the weight of a product while leaving the price more or less unchanged, thereby raising the effective price. In this paper, we empirically examine the extent to which product downsizing occurred in Japan as well as the effects of product downsizing on prices and quantities sold. Using scanner data on prices and quantities for all products sold at about 200 supermarkets over the last ten years, we find that about one third of product replacements that occurred in our sample period were accompanied by a size/weight reduction. The number of product replacements with downsizing has been at a high level since 2007. We also find that prices declined more for product replacements that involved a larger decline in size or weight. Our regression result shows that a 1 percentage point larger size/weight reduction is associated with a 0.45 percentage point larger price decline. Finally, we show that the quantities sold decline with product downsizing, and that the responsiveness of quantity changes to size/weight changes is almost the same as the price elasticity, indicating that consumers are sensitive to size/weight changes as they are to price changes. It implies that quality adjustments based on per-unit prices, which are widely adopted by statistical agencies in various countries, may be an appropriate way to deal with product downsizing.