Posted by: Dirk | June 29, 2008

Fighting inflation: the producer’s side

US food producers have recently been downsizing their food containers, like that of orange juice Tropicana, noted the blog

Seven ounces are gone from the jug.  Side by side, the difference in jug shape is obvious, but consumers rarely get to see the old and the new together on a supermarket shelf.  While they may notice the shape is different, they may not realize they are getting almost a cup less of oj. According to one supermarket dairy manager, the price has stayed the same.

And as is often the case when a product is downsized, the manufacturer diverts your attention away from the net weight statement by pointing out something new.  In this case, they discontinued the old screw cap and added a new flip top one. On second thought, maybe the company just found a new way to screw customers.

So, what about the perspective from the aggregate economy? Does this really curb inflation? Well, maybe.  Assuming that consumers are fooled into believing they buy and consume the same stuff as before (and hence their welfare does not change), less orange juice and stuff to produce and transport the container is needed. This means that people will lose their jobs, since the demand of some industries declines. Assuming that workers in the US are laid off, this will cause unemployment to rise, which will lead to less demand and hence a deflationary impulse.

If consumers notice they are fooled, two thing might happen: 1) demand will decrease even more. People will need to check every food container before buying it, which raises transaction costs. 2) consumers don’t care much and buy the same quantities as before, being quick to find about changes in quantities at no extra cost. Then we will end up with more inflation, again. It seems to me the answer is somewhere in between. Probably, the more money-constraint consumers are, the more they will behave like 1).

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