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

Published date01 January 2014
AuthorSatoshi Imai,Tsutomu Watanabe
DOIhttp://doi.org/10.1111/aepr.12047
Date01 January 2014
Product Downsizing and Hidden Price
Increases: Evidence from Japan’s
Deflationary Period
Satoshi IMAI1† and Tsutomu WATANABE2
1Statistics Bureau of Japan and 2University of Tokyo
In this paper, we empirically examine the extentto which product downsizing occurred during the
deflationary period 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 10 years, we find that about one third of product replacementswere accompanied by a
size/weight reduction. We also find that a 1-percentage point larger size/weight reduction is associ-
ated with a 0.45-percentage point larger price decline, resulting in an effective price increase.
Finally, we showthat the quantities sold decline w ith productdownsizing ,and that the responsive-
ness of the quantity sold to size/weight changes is almost the same as the price elasticity, indicating
that consumers are as sensitive to size/weight changes as they are to price changes. Our results
suggest that the Japanese consumer price index may be downwardly biased rather than upwardly
biased.
Key words: consumer price index, deflation, product downsizing, quality adjustment, scanner
data
JEL codes: E31, C43
1. Introduction
Consumer price inflation in Japan has been below zero since the mid-1990s, clearly indi-
cating the emergence of deflation over the last 15 years. The rate of deflation as measured
by the headline consumer price index (CPI) has been around 1% annually, which is
much smaller than the rates observed in the USA during the Great Depression, indicat-
ing that although Japan’s deflation is persistent, it is only moderate. It has been argued
by researchers and practitioners that, at least in the early stages, the main cause of defla-
tion was weak aggregate demand, although deflation later accelerated due to pessimistic
expectations reflecting firms’ and households’ views that deflation was not a transitory
but a persistent phenomenon, and that it would continue for a while.
Given this environment, it is difficult for firms to raise product prices in response to
an increase in marginal costs, since they have to fear that they will lose a significant share
We would like to thankVagner Ardeo, Paul Armknecht,Bert Balk, Kiyohiko Nishimura, Shigenori
Shiratsuka, Mick Silver,and Jan de Haan for their helpful comments and suggestions on an earlier
version of this paper. This research forms part of a project on“Understanding Persistent Deflation
in Japan”funded by a JSPS Grant-in-Aid for Scientific Research (24223003).
†Correspondence: Satoshi Imai, Statistic Bureau of Japan, 19-1 Wakamatsu-cho, Shinjyuku-ku,
Tokyo162-8668, Japan. Email: s2.imai@soumu.go.jp
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doi: 10.1111/aepr.12047 Asian Economic Policy Review (2014) 9, 69–89
© 2014 The Authors
Asian Economic Policy Review © 2014 Japan Center for Economic Research 69
of their customers if they raise their prices while their competitors do not. One pricing
strategy firms can take in this situation is to reduce the size or the weight of a product
without changing its price, thereby raising the effective price.1There is considerable evi-
dence for such behavior. For example, according to the Statistics Bureau in Japan, which
collects information on the size and weight of products to make quality adjustments of
prices in the CPI statistics, Meiji Co., Ltd. reduced the weight of its “Meiji Milk Choco-
late” from 70 g to 65 g in May 2008, which was followed by further reductions in its
weight from 65 g to 58 g in October 2009 , and from 58 g to 55 g in October 2012.In this
case, the weight of a bar of chocolate was reduced by 21% over 53 months, so that if the
nominal price remained unchanged, this would translate into a per-gram price increase
of 27%.2More recently,Nippon Meat Packers, Inc. announced on May 13,2013 that they
would reduce the weight of ham and sausage products in July without changing factory
prices, thereby raising effective prices by 8%. This was followed by their competitor,
ITOHAM FOODS, Inc., announcing on June 13,2013 that they would reduce the weight
of ham and sausage products by 5–15% without changing factory prices.3
However, the Statistics Bureau does not collect such information on product down-
sizing for all products that are sold because they focus only on representative products
(i.e. the set of products that meet prespecified product type specifications), which
account for about 15% of the entire products.4Therefore, nobody is quite sure to what
extent product downsizing prevails in Japan. This is problematic from the viewpoint of
policymakers, including the central bank, since it implies that the rate of inflation is not
precisely measured by the CPI and is possibly underestimated because of the presence of
hidden price increases due to product downsizing.
This paper is the first attempt to empirically examine the extent to which product
downsizing occurs in Japan, and the consequence of product downsizing on prices and
the quantities sold. To do so, we use daily scanner data on prices and quantities for all
products sold at about 200 supermarkets over the last 10 years, a period where the rate of
inflation in Japan has been below zero. The number of products, for example, in 2010 is
about 360,000. Among those 360,000 products, information on product size or weight is
available for about 270,000, and it is the prices and quantities sold of these products that
we focus on in this paper. Specifically, we start by identifying the “generation sequence”
of products (i.e. which product is a successor to which product) and then identify the
event of a product replacement (i.e. an old product is taken off the market and replaced
by a new one). The total number of replacement events we identify is about 15,000. We
then look at what happened at the time of each product replacement in terms of the size
or weight of the product, the price of the product, and the quantity sold.
Our main findings are as follows. First, we find that about one third of the replace-
ment events that we identified for 2000–2012 were accompanied by a size/weight reduc-
tion. Specifically, among the 15,000 product replacement events, the size/weight was
reduced in 5000 cases, while it was increased in 1500 cases, and remained unchanged in
8500 cases. The annual number of replacement events involving downsizing was less
than 200 from 2000 to 2006, but started to increase in 2007 and reached 1500 in 2008,
when firms faced substantial cost increases due to hikes in the prices of oil and raw
Product Downsizing and Hidden Price Increases Satoshi Imai and Tsutomu Watanabe
© 2014 The Authors
Asian Economic Policy Review © 2014 Japan Center for Economic Research
70

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