Maybe I will pay that Little Extra for the Large One: Quantity Surcharges and Uncertain Consumption

Abstract

Consumer product companies often struggle with the decision of introducing multiple packs in the market; finding the right size and the right price often poses challenges. While many markets across the world present evidence of quantity surcharges, we attempt to bring in a demand-side rationale for these packs. Why would consumers buy such packs when larger packs cost more per unit? We consider a market in which a monopolist seller offers his products to two groups of consumers who are heterogeneous in their willingness to pay, consumption uncertainties, and holding cost parameters. The results from our analytical model suggest that when consumer groups differ widely in their uncertainties involving their consumption, the seller could possibly capture a larger surplus from consumers by charging them more per unit for larger packs. The results also suggest that sellers also have the option of offering a single pack to both groups and, in other cases, simply ignoring a group altogether due to profit considerations. When sellers face a possible capacity constraint the pack offers vary and sellers juggle with similar considerations, leading to interesting unit pricing possibilities.