Profits From Cigarettes, Other 'Vice' Products Bolstered By Users Trying To Cut Consumption, Says Yale Researcher

April 05, 1999

LINTHICUM, MD, April 5 - Sophisticated consumer strategies to restrict their consumption of cigarettes, alcohol, unhealthy foods, and other coveted but problematic "vice" products may actually increase profits for tobacco and other industries by millions of dollars. This conclusion is suggested by new research published in a journal of the Institute for Operations Research and the Management Sciences (INFORMS®).

The study, "Consumption Self-Control by Rationing Purchase Quantities of Virtue and Vice" is by Dr. Klaus Wertenbroch of Yale University's School of Management. It appears in the current issue of Marketing Science, an INFORMS publication. Based on emerging economic and behavioral theories of intertemporal choice, the author develops novel predictions about consumers' sophisticated strategies to cope with their own irrational behavior. The study tests these predictions with an unusual mix of methods from experimental economics and psychology as well as econometric modeling.

Consumers' quasi-rational attempts to control their unwanted consumption impulses influence many everyday purchases, says Prof. Wertenbroch. His award-winning research shows that consumers voluntarily and strategically ration their vice consumption by buying vices in small amounts at a time. That prevents them from giving in to the temptation to consume vices excessively. For example, he says, many smokers attempt to cut down on their consumption by deliberately buying cigarettes by the pack rather than the carton. Similarly, dieters often select smaller containers of "forbidden" foods. But because larger sizes are typically offered at quantity discounts, these consumers end up paying marketers a premium -- they forgo the sizable per-unit savings available for larger purchase quantities as the price of self-control. Significantly, they're also less likely to cut down on their consumption when prices go up.

Broad Implications for Marketers

These effects have broad implications for marketers' product and pricing policies, says the author, noting, for example, that tobacco companies might introduce new strategies like selling cigarettes in more varied quantities, such as 10 cigarettes per pack at a premium as well as current pack sizes of 20 cigarettes.

The author explains, "Such rationing implies that, per purchase occasion, vice consumers will be less likely than virtue consumers to buy large quantities in response to unit price reductions such as quantity discounts." From a managerial perspective, he says, "the findings offer marketing practitioners in many consumer goods industries new opportunities to increase profits through segmentation and price discrimination based on consumer self-control. They can charge premium prices for small sizes of vices, relative to the corresponding quantity discounts for virtues."

Virtue consumers, he finds, tend to buy larger amounts even when quantity discounts are relatively shallow. On the other hand, companies that want to induce consumers of vice products to purchase in greater quantities must offer bigger discounts.

Analyzing matched pairs of vice and virtue supermarket products, the author found that consumers receive an average quantity discount of only 25.7% for doubling their purchase quantity of a virtue, compared to a much deeper 36.4% for doubling that of a corresponding vice.

Looking at these results from a broader policy perspective, the author cautions, "Public policy makers may, or perhaps should, show concern about firms charging consumers a premium for 'virtuous,' or self-constrained, consumption behavior." A surprising public policy implication of the research is that raising cigarette taxes may actually be counterproductive, if the additional taxes cause smokers who currently buy cigarettes by the pack to switch to relatively cheaper but larger cartons.

Data

The author conducted several laboratory experiments and field studies comparing prices and sales of products that might be classified as relative vices with those of matched virtue products. These pairs of vices and virtues included, among others, regular and light cigarettes, ice cream and frozen yogurt, alcoholic and light and non-alcoholic beer, regular and low-sugar cereal, regular and low-fat cheese, pornographic and news magazines, and doughnuts and muffins.

One experiment showed that consumers forgo quantity discounts in order to ration their consumption of vice purchases. The test subjects were 304 graduate students. A second experiment with 310 students as subjects showed that their preferred purchase quantities depended on their need for self-control.

The field studies examined real market data to confirm results of the experiments. One field study showed that retail quantity discounts for relative vices and virtues are consistent with purchase quantity rationing. The study analyzed quantity discounts among 30 pairs of consumer product categories that had been carefully selected with respect to a number of criteria such as retailer and consumer inventory costs and frequency of consumption. A second study showed that consumers' store-level demand is consistent with purchase quantity rationing. It analyzed a year's worth of sales data in several categories, over 500,000 data points, from a major supermarket chain with more than 80 stores and a 20% market share in metropolitan Chicago.
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The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 12,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications.



Institute for Operations Research and the Management Sciences

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