Measurement costs and pricing methods in the retail produce market

Abstract

A persistent practice in the retail produce market is the mixed use of per unit and per pound pricing for bulk produce commodities. While per pound pricing explicitly prices the size dimension of the produce, per unit pricing (known in the industry as "by the each" pricing) is a form of average pricing whereby units differing in size and value are sold for the same price. When goods are average priced, opportunities exist for buyers to find units of exceptional value at the going price. Exploiting these opportunities requires buyers to measure and compare the values of individual units. Measurement of this kind often results in costly wealth transfers among buyers and between buyers and sellers. Profit maximization implies that sellers will avoid average pricing and its associated measurement costs whenever alternative pricing methods can be implemented at lower cost. This study examines the implications of measurement costs in the retail produce market, and develops predictions concerning the seller's decision to set an average price (price per each) or a price per pound. Logistic regression analysis is used to test the predictions on retail price data from major retailers in Bozeman, Montana. The results suggest that sellers choose between the two pricing methods in a manner that is consistent with the minimization of pre-sale measurement costs.