Quantity Surcharge

We explored the prevalence and the reason of quantity surcharge (QS), a counterintuitive pricing phenomenon where larger quantities of a product are sold at a higher unit price than smaller quantities. By using retail scanner data from NielsenIQ, we documented the prevalence of QS over 9 product categories. Also, by combining retail scanner data with consumer panel data, we found indirect evidence that consumer inattention could be one of the sources of QS. We applied a novel approach, so called flexible logit, to structurally capture consumer inattention and estimate underlying demand parameters robust to consumer search model. We also conducted counterfactual simulations to assess the impact of quantity surcharges on consumer surplus and firm revenue, suggesting that eliminating quantity surcharges or more attentive consumer behavior towards pricing could lead to a small increase in consumer surplus but big decrease in firm's revenue. The findings have implications for decomposition for the different rationales of quantity surcharges.