Tag: Price leadership

Shrinkflation in the Comic Book Industry

Action Comics No. 1, published in June 1938, is often consider the first superhero comic book. (Image from comics.org.)

In a political advertisement that ran before the broadcast of the Super Bowl, President Joe Biden discussed shrinkflation, which refers to firms reducing the quantity of a product in container while keeping the price unchanged. In this post from the summer of 2022, we discussed examples of shrinkflation—including Chobani reducing the quantity of yogurt in the package shown here from 5.3 ounces to 4.5 ounces—and noted that shrinkflation complicates the job of the Bureau of Labor Statistics when compiling the consumer price index. 

This yogurt remained the same price although the quantity of yogurt in the container shrank from 5.3 ounces to 4.5 ounces.

Shrinkflation isn’t new; firms have used the strategy for decades. Firms are particularly likely to use shrinkflation during periods of high inflation or during periods when the federal government implements price controls.  Firms also sometimes resort to shrinkflation when the the price of a product has remained constant for long enough that the firms fear that consumers will react strongly to the firms increasing the price.

Comic books provide an interesting historical example of shrinkflation. David Palmer, a professor of management at South Dakota State University published an article in 2010 in which he presented data on the price and number of pages in copies of Action Comics from 1938 to 2010. When DC Comics introduced Superman in the first issue of Action Comics in June 1938, it started the superhero genre of comic books. Action Comics No. 1 had a price of $0.10 and was 64 pages.

After the United States entered World War II in December 1941, the federal government imposed price controls to try to limit the inflation caused by the surge in spending to fight the war. Rising costs of producing comic books, combined with the difficulty in raising prices because of the controls, led comic book publishers to engage in shrinkflation. In 1943, the publishers reduced the number of pages in their comics from 64 to 56. In 1944, the publishers engaged in further shrinkflation, reducing the number of pages from 56 to 48.

In 1951, during the Korean War, the federal government again imposed price controls. Comic book publishers responded with further shrinkflation, keeping the price at $0.10, while reducing the number of pages from 48 to 40. In 1954, they shrank the number of pages to 36, which remains the most common number of pages in a comic book today. At that time, the publishers also slightly reduced the width of comics from 7 3/4 inches to 7 1/8 inches. (Today the typical comic book has a width of 6 7/8 inches.)

By the late 1950s, comic book publishers became convinced that they would be better off raising the prices of comic books rather than further shrinking the number of pages. But they were reluctant to raise their prices because they had been a constant $0.10 for more than 20 years, so children and their parents might react very negatively to a price increase, and because no firm wanted to be the first to raise its price for fear of losing sales to its competitors. They were caught in a prisoner’s dilemma: Comic book publishers would all have been better off if they had raised their prices but the antitrust laws kept them from colluding to raise prices and no individual firm had an incentive to raise prices alone. (We discuss collusion, prisoner’s dilemmas, and other aspects of oligopolistic firm behaviour in Chapter 14 of Microeconomics and Economics.)

The most successful publisher in the 1950s was Dell, which sold very popular comic books featuring Donald Duck, Uncle Scrooge, and other characters that particularly appealed to younger children. Because the prices of Dell’s comic books, like those of other publishers, been unchanged at $0.10 since the late 1930s, the firm didn’t have a clear idea of the price elasticity of demand for its comics. In 1957, the firm’s managers decided to use a market experiment to gather data on the price elasticity of demand. In most cities, Dell kept the price of its comics at $0.10, but in some cities it sold the identical comics at a price of $0.15.

The experiment lasted from March 1957 to August 1958 when the company discontinued it by reverting to selling all of its comics for $0.10. Although we lack the data necessary to compare the sales of Dell comics with a $0.15 price to the sales of Dell comics with a $0.10 price, the fact that no other publisher raised its prices during that period and that Dell abandoned the experiment indicates that the demand curve for Dell’s comics was price elastic—the percentage decline in the quantity sold was greater than the 50 percent increase in price—so Dell’s revenue from sales in the cities selling comics with a price of $0.15 likely declined. Dell’s strategy can be seen as a failed example of price leadership. (We discuss the relationship between the price elasticity of demand for a good and the total revenue a firm earns from selling the good in Chapter 6, Section 6.3 of Microeconomics and Economics. We discuss price leadership in Microeconomic and Economics, Chapter 14, Section 14.2.)

In March 1961, Dell increased the price of all of its comics from $0.10 to $0.15. At first, Dell’s competitors kept the prices of their comics at $0.10. As a result, in September 1961, Dell cut the price of its comics from $0.15 to $0.12. By early 1962, Dell’s competitors, including DC Comics, Marvel Comics—publishers of Spider-Man and the Fantastic Four—along with several smaller publishers, had increased the prices of their comics from $0.10 to $0.12. The managers at DC decided that raising the price of comics after having kept it constant for so long required an explantion. Accordingly, they printed the following letter in each of their comics.

H/T to Buddy Saunders for the image.

Comic book publishers have raised their prices many times since the early 1960s, with most comics currently having a price of $4.99. During the recent period of high inflation, comic publishers did not use a strategy of shrinkflation perhaps because they believe that 36 pages is the minimum number that buyers will accept.

The first 25 years of the comic book industry represents an interesting historical example of shrinkflation.

Price Leadership in the Beer Market

InBev’s St. Louis production line for Stell Artois beer. Photo from the Wall Street Journal

Firms in an oligopoly can increase their profits by agreeing with other firms in the industry on what prices to charge. Explicit price fixing violates the antitrust laws and can subject the firms involved to fines of up to $100 million and executives at the firms to fines of up to $1 million and prison terms of up to 10 years. Despite these penalties, the rewards to avoiding price competition are often so great that firms look for ways to implicitly collude—that is, to arrange ways to coordinate their prices without violating the law by explicitly agreeing on the prices to charge. (We discuss the antitrust laws in Microeconomics and Economics, Chapter 15, Section 15.6.) 

One way for firms to implicitly collude is through price leadership. With price leadership, one firm in the industry takes the lead in announcing a price change that other firms in the industry then match. (We briefly discuss price leadership in Microeconomics and Economics, Chapter 14, Section 14.2.)

In their classic industrial organization textbook, F.M. Scherer of Harvard’s Kennedy School and David Ross of Bryn Mawr College summarize the legal status of price leadership, given court opinions from antitrust cases: “[P]rice leadership is not apt to be found contrary to the antitrust laws unless the leader attempts to coerce other producers into following its lead, or unless there is evidence of an agreement among members of the industry to use the leadership device as the basis of a price-fixing scheme.” As the Federal Trade Commission notes on its website: “A uniform, simultaneous price change could be the result of price fixing, but it could also be the result of independent business responses to the same market conditions.”

Scherer and Ross describe price leadership in a number of oligopolistic industries during the twentieth century, including cigarettes, steel, automobiles, breakfast cereals, turbogenerators, and gasoline.

Recently, Nathan Miller of Georgetown University, Gloria Sheu of the Federal Reserve, and Matthew Weinberg of Ohio State University published an article in the American Economic Review analyzing price leadership in the beer industry. They focus on the period from 2001 to 2011, although they believe that conditions in the beer industry are similar today. From 2001 to 2007, three large U.S.-based firms—Anheuser-Busch, SABMiller, and Molson Coors—accounted for about two-thirds of beer sales in the United States. Two importers—Heineken and Grupo Modelo—accounted for about 14 percent of sales.  In 2008, SABMiller and Molson Coors combined to form MillerCoors and InBev—which had a small market share—bought Anheuser Busch. In 2011, MillerCoors and InBev together accounted for 63 percent of beer sales.

ABI has acted as the price leader, announcing prices in the late summer that MillerCoors typically matches. ABI’s Bud Light had the largest market share among beers in the United States in 2011, well ahead of Coors Light, which had the second largest share. They find that industry profits were 17 percent above the competitive level in 2007—just before the Miller-Coors merger—and 22 percent above the competitive level in 2010—after the merger. The U.S. Department of Justice (DOJ) had decided not to contest the Miller-Coors merger because “cost savings in distribution likely would offset any loss of competition.” As it turned out, the cost savings occurred but their value was smaller than the losses in consumer surplus resulting from reduced competition.

The authors estimate that, compared with the competitive outcome, the reduction in consumer surplus in the beer market due to price leadership equaled 154 of the increase in producer surplus before the Miller-Coors merger and 170 percent after it. Figure 15.5 from Chapter 15 of Microeconomics (reproduced below) illustrates why the loss of consumer surplus is larger than the increase in producer surplus: The increase in price and decline in quantity compared with the competitive level results in a deadweight loss that reduces the total economic surplus in the market. (Note that the figure is comparing the situation when a market is monopoly with the situation when the market is perfectly competitive. For simplicity, we are assuming that price leadership in an oligopolistic industry, such as beer, results in the monopoly outcome. But note that whenever collusive behavior, like price leadership, occurs in an industry, we would expect an increase in deadweight loss that will make the gains to firms larger than the losses to consumers.)

Sources: Federal Trade Commission, “Price Fixing,” ftc.gov; U.S. Department of Justice, Antitrust Division, “Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look for,” justice.gov; Nathan H. Miller, Gloria Sheu, and Matthew C. Weinberg, “Oligopolistic Price Leadership and Mergers: The United States Beer Industry,” American Economic Review, Vol. 111, No. 10, pp. 3123-3159; and F.M Scherer and David Ross, Industrial Market Structure and Economic Performance, Third edition, Boston: Houghton Mifflin, 1990.