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As a student in 2009, I became intrigued by the economics of shrinking consumer packaged goods after the Great Recession of 2008, when food prices spiked to historically high levels. Around the same time, shrinkflation (or package downsizing, or simply downsizing, as economists call it) was increasingly noticeable in grocery stores across many foods and household necessities.

Over a decade later, we again have historically high consumer prices, and downsizing has become widely noticeable. However, this time, the topic has also become central to a lively policy debate, fueled by President Joe Biden's criticism of the practice on social media and during his State of the Union address. Central to the debate is whether the government should regulate shrinkflation. If yes, how?

With historically high inflation, consumer budgets have already taken a hit; hence, seeing everyday grocery items shrink only adds insult to injury. Furthermore, downsizing appears to be a deceptive pricing practice due to apparent attempts to conceal the shrinkage. Such attempts provide a rationale and the moral ground for legislation that bans shrinkflation. However, the debate generally lacks sound analysis of why producers engage in downsizing and, from the producers' point of view, why shrinkflation has been successful. The widespread notion that producers' motivation is to deceive shoppers is simply inaccurate.

Ironically, the decision to downsize a product package is costly to producers as it requires retooling production lines. If producers only sought to increase the unit price, they could achieve this by putting on a new price tag. So, there must be a strong rationale for downsizing: its effectiveness in allowing producers to respond to rising costs while keeping the package price within an acceptable range. But why is keeping the price in an acceptable range so crucial for producers and consumers?

Consumer packaged goods markets are highly competitive. In any product category, consumers have many alternatives that are comparable in price and quality. In such marketing environments, the range of acceptable prices for a product is narrow. For example, if a shopper's acceptable price range for a tub of ice cream is between $4 and $6, the shopper will not buy a product that exceeds $6. When consumers' acceptable price range is narrow, producers cannot raise grocery goods and necessities prices without hurting sales. Therefore, downsizing becomes a viable strategy for producers, especially when facing significant increases in production costs.

However, producer incentives are only one side of the story. The success of downsizing critically depends on consumer and retailer responses. My research shows that downsizing works because consumers are less responsive to package size changes when making purchase decisions than the equivalent changes in the package price. The reasons are that they either do not realize the change or, all else equal, they like the small size better, or a combination of both.

Shoppers might not notice downsizing because they generally do not use quantity indicators on the package but rely on visual estimations of package volume. Furthermore, buyers may be unaware of price differences due to difficulties processing price information or relying on non-price cues such as previous purchase experiences. These are the primary factors highlighted and widely discussed in media accounts to critique shrinkflation. However, they are incomplete. Consumers might also prefer small sizes because they are affordable, especially when inflation reduces purchasing power. Furthermore, small sizes might be preferable as they allow shoppers to buy a wider variety of flavors, store packages more easily and help them control portion size.

No evidence suggests that downsizing causes more inflation than its alternative of raising package prices — as the term "shrinkflation" might suggest. However, downsizing is a problem if information about it is not fully transmitted to consumers, which causes market inefficiencies as consumers are likely unaware of unit price differences. Then, how should the government tackle the problem?

Not by "cracking down on corporations." Implementing broad package size controls or bans on shrinkflation would create larger inefficiencies and are bound to be ineffective. Inefficiencies arise as restrictions on package size limit producers' capacity to meet consumer demand, resulting in suboptimal allocation of resources in production and consumption. Furthermore, it would be ineffective, since sellers could easily develop tactics to evade controls. For example, they could introduce new small-size products at the same price while still carrying the old large-size products with limited supply at a higher price. This practice would be adding a new item to the product line and not downsizing. Furthermore, the cost of these regulations and the complexity of the consumer goods market would demand additional bureaucracy and further strain federal regulators.

Instead, sound policies would target the problem's root cause — ensuring package size information is effectively communicated and improving consumer awareness and ability for unit-price comparisons. The National Institute of Standards and Technology (NIST) compiles model laws and regulations in many relevant areas, including packaging weights and measures, labeling and pricing. Policies could promote comprehensive adoption of NIST's model laws and regulations across all states and local governments. Furthermore, the model laws and regulations could be revised to address the complexities of shrinkflation. For example, limiting packaging features that are not visible to consumers and are deceptive, as seen in bottles with concave bottoms. Also, labeling regulations could ensure that consumers more easily see quantity-based size indicators on product packages rather than confusing verbal indicators (such as "mega," "super," "giant," "large" or "family," indicating bigger size products).

Eventually, policies targeting improved product information and increased consumer awareness can address market inefficiencies due to shrinkflation without the costs of direct controls on package size.

Metin Çakır is an associate professor and the director of graduate studies in the Department of Applied Economics at the University of Minnesota.