DP8115 Sales, Quantity Surcharge, and Consumer Inattention

Author(s): Sofronis Clerides, Pascal Courty
Publication Date: November 2010
Keyword(s): consumer inattention, nonlinear pricing, promotions, quantity discounts, quantity surcharge, sales
JEL(s): D4, L12, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8115

Quantity surcharges occur when firms market a product in two sizes and offer a promotion on the small size: the large size then costs more per unit than the small one. When quantity surcharges occur the sales of the large size decrease only slightly despite the fact that the small size is a cheaper option - a clear arbitrage opportunity. This behavior is consistent with the notion of rationally inattentive consumers that has been developed in models of information frictions. We discuss implications for consumer decision making, demand estimation, and firm pricing.