Marketing of Vice Goods: A Strategic Analysis of the Package Size Decision

Abstract

Consumers are often unable to resist the temptation of overconsuming certain products such as cookies, crackers, soft drinks, alcohol, etc. To control their consumption, some consumers buy small packages or abstain from purchasing the product altogether. Other consumers, however, still purchase large packages and overconsume. From a strategic perspective, firms have the option of introducing small packages or only offering large packages. We use the literature on hyperbolic discounting to model consumers' self-control problems and examine conditions under which firms will offer small packages to help consumers combat their self-control problem, and how this offering in turn affects prices, profits, consumer, and social welfare. Our results show that introducing small packages can increase firms' profits only when a small fraction of consumers have overconsumption problems or when small packages can bring in new customers. Additionally, we find that competition can sometimes reduce the incentives for firms to introduce small packages. This is particularly true when a large fraction of consumers is attracted to small packages. We also find that firms' profits can sometimes decrease if they produce healthier alternatives of their goods. Our analysis of consumer welfare reveals that small packages enhance consumer and social welfare, even though they sometimes increase the consumption of vice goods.