Reducing Packaging Waste and Cost via Consumer Price Discounts

Decision Sciences 43(6) pp. 1063-1089. Article first published online: 23 OCT 2012. DOI: 10.1111/j.1540-5915.2012.00385.x

46 Pages Posted: 20 Sep 2014 Last revised: 26 Sep 2014

See all articles by Tolga Aydinliyim

Tolga Aydinliyim

Zicklin School of Business, Baruch College, CUNY

Michael S. Pangburn

University of Oregon

Date Written: August 18, 2012

Abstract

Low-waste packaging may imply an inconvenience to consumers and cause firms to offer a compensating price discount. For example, Starbucks’ “Take the Mug Pledge” campaign provides a 10-cent discount for customers who purchase coffee without a standard cup (i.e., customers provide their own cup). Understanding how such a discount drives demand and profit is the focus of this article. We consider a monopolist that can offer a reduced-packaging option for its product at a variable cost savings. That option implies a transactional “inconvenience” cost for consumers. While that transactional cost is generally positive, our model also permits some consumers to associate convenience with reduced packaging. We derive the optimal price and discount that maximize profits. We show the optimal discount is bounded by the magnitude of the variable cost savings associated with the packaging reduction. We explore when the optimal discount is negative (a price premium), which requires a specific proportion of consumers to associate convenience with reduced packaging. We also derive conditions under which the firm should price to eliminate demand for the standard product, rather than segment the market, to leverage the variable cost savings of reduced packaging. When the variable cost savings are low (e.g., as is true for Starbucks), we show the profit curve for the segmenting policy is relatively flat for a discount up to several multiples of the cost differential. Finally, we demonstrate the potential for the reduced packaging option, with optimal discounting, to simultaneously increase profit and consumer surplus while reducing waste.

Keywords: Operations/Marketing interface, Packaging, Pricing, Source Reduction.

Suggested Citation

Aydinliyim, Tolga and Pangburn, Michael S., Reducing Packaging Waste and Cost via Consumer Price Discounts (August 18, 2012). Decision Sciences 43(6) pp. 1063-1089. Article first published online: 23 OCT 2012. DOI: 10.1111/j.1540-5915.2012.00385.x , Available at SSRN: https://ssrn.com/abstract=2498101

Tolga Aydinliyim (Contact Author)

Zicklin School of Business, Baruch College, CUNY ( email )

55 Lexington Ave
New York, NY 10010
United States

Michael S. Pangburn

University of Oregon ( email )

Eugene, OR 97403
United States

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