Are More People Turning on the Tap Than Opening Their Wallets?

After more than 10 years of growth, bottled-water sales are declining – the victim of a recessionary economy and increased environmental concerns over plastic containers, says an article in today’s Wall Street Journal.

According to the Journal, in the first quarter of 2009, “bottled-water brands sold for an average of $1.35 a gallon in the U.S., down more than 30% from $1.94 in 2001.... Some analysts predict the price of bottled water could fall even further by next summer.”

The major bottled-water manufacturers, including PepsiCo, Coca-Cola and Nestle, say that they are reducing the amount of plastics in their bottles, that they expect sales to pick back up once the economy is on more solid footing, and that lowered water prices are, in some cases, simply a strategy to drive more traffic into stores, the article notes.

Water isn’t the only beverage that is experiencing a price war. Coffee companies have been ratcheting up the battle for consumers’ hearts, minds and caffeine addictions ever since Starbucks entered the market in the early 1970s. The current recession has only increased the competition. Starbucks continues to adjust its business model – see the Journal’s recent Heard on the Street column -- as does Dunkin’ Donuts, McDonalds and 7-Eleven, among others. For insights into how companies tried to corner the coffee market in earlier times, see an article in Knowledge@Wharton titled, “The Coffee Wars Heat Up: New Strategies to Jolt the Caffeine-Conscious Consumer. “

Why Walt Disney Is Happy to See a Gay-themed Miley Cyrus Knock-off Video Go Viral

David Fudge, a 27-year-old magazine marketing executive, told The New York Times Media Decoder blog that he expected the Walt Disney Co. to come down hard and fast on his video, posted on YouTube, featuring gay men dancing and whooping it up at Fire Island, N.Y., to the tune of Cyrus's new single, “Party in the USA.” Cyrus is, after all, one of Disney's biggest franchises, a G-rated star of Disney movies, concerts and recordings. Instead, said Fudge, he got a call from Rich Ross, the president of Disney Channels Worldwide. “I was like, who?” Fudge told The Times. “He just said that he loved it and wanted to tell us that. He was extremely nice.”

The blog says that Ross declined to comment, but that another Disney executive said the video demonstrated that "Ms. Cyrus was broadening her fan base beyond little girls." The blog also notes that  "at a time of declining CD sales, even a teen queen like Ms. Cyrus needs all the attention for her songs that she can get." And it got plenty. More than 240,000 views since it was posted on Wednesday should not hurt sales of Cyrus's new album, “The Time of Our Lives,” which arrives in Wal-Mart stores on Monday.

While Ross declined to speak to The Times, he did speak at Wharton earlier this year. Read about what he had to say in the Knowledge@Wharton article, "Do You Know Where Your Kids Are? Disney's Rich Ross Probably Does."

Rural Pennsylvania Health System Points the Way to Innovation

In the Geisinger Health System of Danville, Pennsylvania, about 150 miles northwest of Philadelphia, primary-care doctors are assigned a nurse who oversees the most chronically ill patients. By closely monitoring such measures as blood sugar levels, the nurses keep emergency-room visits - and costs - down. Another Geisinger program guarantees the price of heart surgery, recovery and therapy from the day of diagnosis until 90 days after the operation, giving doctors and other providers incentives to avoid errors.

Such innovations, according to an article in The Philadelphia Inquirer, have won national accolades for Geisinger, including a mention by President Obama. But other innovations have not come cheaply. At a recent conference covered by the newspaper, Howard R. Grant, Geisinger's chief medical officer, said the health system's electronic-records system, which helps the health system keep tabs on every aspect of patient care, costs tens of millions per year. "We believe it's valuable. We believe it leads to better care, but people need to understand the size of that investment as well."

Indeed, the application of medical information technology has had mixed results as a cost-cutter for health care. "No one has done the careful research to indicate that if one health care system has information technology and the other doesn't, then the care is different. There are no controlled trials," Mark Pauly, a health care management professor at Wharton, told Knowledge@Wharton in an article titled, "Information Technology: Not a Cure for the High Cost of Health Care." Information technology could actually raise costs because of culture clashes, training, the implementation of the systems and the labor required to maintain the new technology, he suggested. "The best-case scenario is that information technology will improve quality but not lower costs. The worst case is that there's no difference at all."

Fore more on healthcare costs from Knowledge@Wharton, see:

Another Hurdle to Health Care Reform: Too Few General Practice Doctors

One Way to Lower Health Costs: Pay People to Be Healthy

Why Consumers -- Not Companies -- Should Make Health Care Decisions

Despite Being Early to E-book Market, Sony Now Plays Catch Up

The 30th anniversary of Sony's Walkman music player last month reminded us how long it has been since the consumer electronics manufacturer came up with a product that actually created a new market (see the KnowledgeToday post of July 2: "When the Walkman Roamed"). The Walkman established the personalized portable music player segment, but was eventually eclipsed by Apple's iPod digital music player.

In 2005, Sony marketed the first e-book reader to use "electronic paper" technology, a display that could be read even in direct sunlight and which consumes no power while it is showing a static image. Unlike the Walkman, it was not an overnight success, and it was quickly overshadowed in 2007 by Amazon's Kindle reader, which also used the e-paper technology. Kindle became even more dominant with the introduction of its second-generation models this year.

So Sony's introduction today of its third-generation reader, the $399 Sony Reader Daily Edition represents an effort to catch up with and pass Kindle. Indeed, as The Wall Street Journal reports today, the new product one-ups Kindle by offering a touch screen and access to books from a wider range of sources, including libraries. Kindle's selections come almost exclusively from Amazon.com. The Financial Times notes that Sony has yet to announce when the Reader Daily Edition will be available in other markets, but that it could be aiming to upstage Amazon, which has yet to make its Kindle family of wireless readers available outside the U.S.

Today's introduction also underscores the technological transformation of the publishing world, which was described by Knowledge@Wharton earlier this month in an article titled, "Technological Evolution Stirs a Publishing Revolution." The degree to which the new electronic readers supplant traditional book publishing will depend greatly on consumer psychology, Wharton marketing professor Cassie Mogilner said in the article. "Books in themselves have value from two different [sources]. One is the time you spend absorbing the content. Two is from the ownership of the physical object. And the physical object serves as a visual cue -- both to yourself, of your reading, and also to others. People have collections, a kind of visible bibliography of what you know. What's interesting with the Kindle is that its value is really just the first value. It doesn't carry the same collection or visual cue."

More from Knowledge@Wharton:

Getting a Read on Amazon's New Kindle

Sony's Next Act: Will It Play?

As Sony Gets a Tune-up, Samsung Zooms Ahead

Forecasts Show That Challenges Remain

A new forecast for a bigger than expected decline in the U.S. economy this year has forced the Obama administration to increase its estimate for the federal budget deficit to $9 trillion from $7.1 trillion over the next decade. The administration also acknowledged for the first time today that the unemployment rate is likely to reach 10% by 2010. The Department of Labor put unemployment at 9.4% in July.

The numbers show that the downturn is deeper than the administration believed, and that while there is a trajectory pointing to recovery, it is likely to take many months or years to unfold. In a June article -- "Economic Recovery: Are Happy Days Here Again?" -- Knowledge@Wharton asked Wharton faculty about the prospects for recovery and found that even their most optimistic forecasts were tempered with concern about the pace and strength of the turnaround. "Many of the underlying problems remain -- and we still haven't seen the worst in terms of consumer problems," said Mauro Guillen, Wharton professor of international management and sociology and director of the Lauder Institute at Penn. He listed some of these problems as ongoing mortgage woes for U.S. homeowners and a deepening crisis in consumer credit card debt, looming troubles for commercial real estate, and the ongoing issue of so-called "toxic assets" on the books of larger banks, which he said were likely to impede their ability to make the loans that would spur a recovery.

For more on the prospects for and challenges to recovery, see:

Deflation Fears: Could Falling Prices Let the Air Out of a Recovery?

Jeremy Siegel: 'The Market Will Stage Another Recovery'

Trade Wars: Will Protectionism Win out over Recovery?

 

Clunkers Program Drives into the Sunset

The U.S. government's "cash for clunkers" program, which pays Americans $3,000 to $4,500 to trade in their older model vehicles for fuel efficient new ones, may have been popular, but it was not without its share of problems. Because demand far exceeded the government's expectations, Congress had to increase funding to $3 billion from $1 billion. And the program, which was originally expected to last through Labor Day, ends today with just $320 million worth of vouchers remaining to distribute. Now, many auto dealers say they need more time to submit the paperwork required to be paid for the vouchers they distributed, and many have yet to be paid even though their paperwork is complete.

"We expect a nationwide rush at the end of Monday that will clog the government computers," Scott Lambert, executive vice president of the Minnesota Auto Dealers Association, told the Minneapolis Star-Tribune. "If that means dealers can't get their deals submitted on Monday night, we'll go back to our congressional delegation and ask for some leeway on the federal deadline." Most of Minnesota's dealers are still waiting to be reimbursed, Lambert also told the paper. Of the 12,000-plus sales so far, subsidies for 82% of them -- worth about $50 million -- still are pending, he said.

The Wall Street Journal reports that many dealers are moving early to halt sales to give themselves time to process paperwork. They worry that if a last-minute rush to enter applications jams the system, they will be on the hook for rebates already given to customers.

For more from Knowledge@Wharton about the program and the state of the auto industry, see: Can 'Cash for Clunkers' Help Jump-start the Auto Industry?

Panasonic Signs Director Cameron to Help Pitch New 3-D Television Sets

Here's a classic marketing challenge: How do you convince customers that they need a product that they have lived without all their lives? The product is 3-D television, the latest flat-panel marvel to be offered by the consumer electronics industry. One answer is to tie its introduction to one of the most highly anticipated movies in years. The Associated Press reports that Panasonic's sales pitch will come from director James Cameron, whose coming 3-D movie, Avatar, is already the subject of breathless buzz. Tickets to see a trailer with some scenes from the movie tonight at specially equipped IMAX 3-D theaters are sold out. The film will premier in December.

The AP says that Panasonic is hoping its collaboration with Cameron will give it an edge in brand image as a 3-D leader as well as in obtaining suggestions for technological improvements for home TVs. Said General Manager Masayuki Kozuka: "We want to get global interest rolling. For people to want to watch 3-D at home, the movie has to be a blockbuster."

For more from Knowledge@Wharton on 3-D movies, blockbusters and the business of Hollywood, see:

3D Movies: Adding Depth or Falling Flat?

'Inventing the Movies': The Epic Battle between Innovation and the Status Quo in Hollywood

In a Recessionary Summer, Hollywood's Fondness for the Familiar Only Grows

Joss Whedon's Plan to Monetize Internet Content (Watch Out, Hollywood)

Luxury Retailer Neiman Marcus Is Bitten by the Sharp Teeth of an Ocelot

In a tough year for luxury retailers, every sale counts. That might be especially true at Neiman Marcus, which reported a 27.1% sales decline in July compared to June. And that might be why the luxury retailer told The Dallas Morning News that it would contact but not necessarily provide refunds to online customers who paid nearly $1,500 for a pair of Manolo Blahnik boots that were not trimmed with the ocelot fur described on the Neiman Marcus web site.The boots were actually trimmed with goat hair that was dyed to look like ocelot fur. Neiman Marcus told the newspaper that the description of the boots was an error which has since been corrected. It's not known how many customers bought the pricey boots, or if any of them demanded refunds. But the erroneous claim raised the fur of the Humane Society of the United States, which issued a news release pointing out that, if indeed it was real ocelot fur spilling down from the top of the white knee-high, high-heel boots, then Neiman Marcus was breaking the law, given the ocelot's official status as an endangered species.

Any short-term impact on sales as a result of the error is likely less of a concern for Neiman Marcus than the need to preserve its reputation for quality in the long term. In a November 2008 Knowledge@Wharton article,"Luxury Brands: Marketing the Upscale During a Downturn," a panel or high-end retail executives described their efforts to maintain the reputations that support their prices.

More from Knowledge@Wharton:

The New High-end Consumer: 'Please Put My Bottega Veneta Wallet in a Plain Bag'

The Shopper of Tomorrow: Trading Down

Lifting the Veil of Secrecy That Hides Swiss Bank Accounts

The Wall Street Journal reports today that UBS will hand over to the United States Internal Revenue Service some 4,450 names of American account holders as part of a U.S.-Swiss tax-evasion settlement and investigation that could produce up to 10,000 account identities. The U.S. had originally sought the names of 52,000 Americans holding secret accounts at Swiss banks, but IRS Commissioner Doug Shulman said this morning that the agreement gives the IRS substantially all the information it was interested in. This was the second legal settlement between the U.S. and UBS this year. To avoid criminal prosecution, UBS admitted in February to helping wealthy Americans shirk their tax obligations and agreed to pay $780 million in penalties and reveal the names of roughly 250 U.S. customers who allegedly set up sham accounts.

The earlier settlement prompted Wharton professor of operations and information management, Maurice Schweitzer, to declare that "Swiss banking as we have known it is dead." In an April Knowledge@Wharton article, titled "The Other Banking Drama: Those Secret Swiss Accounts," Schweitzer said that turning over the 250 client names put a "chink" in the system that will destroy the trust of wealthy people around the world in Swiss bank accounts. "Secrecy is at the heart of Swiss banking. This UBS case shakes that foundation of trust that clients had placed in Swiss banks regarding the secrecy [of] those accounts."

With the settlement announced today, the chink appears to have grown into a barn door. But the potential tax revenue to be harvested from those accounts won't put even a chink in the U.S. budget deficit. The accounts in question contained more than $18 billion, Shulman said.

Why Social Network Users Won't Be Easily Scared Off by Security Concerns

After several security breaches on the Twitter network this month -- including one involving the use of a so-called "botnet" to harvest online banking passwords on the computers of more than 200 Twitter users in South America -- it would not be hard to imagine that many people would shy away from the fast-growing social network.

But a significant retreat from Twitter is not a likely outcome, say Wharton faculty. "The appeal of Twitter is not [about] security but rather an avenue to exchange information and contact friends," said Wharton marketing professor Eric T. Bradlow, who co-directs the Wharton Interactive Media Initiative. "I don’t see this as having a major impact on Twitter, except to the degree that it degrades or influences their brand."

Besides, most social network users -- including those on popular sites such as Facebook and MySpace --  "are oblivious to security issues," according to Wharton legal studies and business ethics professor Andrea M. Matwyshyn. Her view that users of social networks too often "live out loud," posting details about themselves that make them vulnerable to identity theft, was the subject of a recent Knowledge@Wharton article titled, "Leaving 'Friendprints': How Online Social Networks Are Redefining Privacy and Personal Security."

Many Twitter users also place a high value on having many "followers," people whom they may or may not know but who choose to receive their Twitter postings. "On Twitter there is a status dynamic that comes from having many followers," Matwyshyn points out. A person with many followers can be viewed as someone whose brief Twitter updates are particularly interesting. But many of those followers may be more interested in identity theft, she says. She recommends that Twitter users regularly cull followers they do not know.

More from Knowledge@Wharton:

Advertising Yourself: Building a Personal Brand through Social Networks

All That Twitters Isn't Gold: A Popular Web Application in Search of a Business Plan

Europe Appears to Be Emerging from Recession – but Pitfalls Remain

The German and French economies, key drivers for Euro zone economic growth, sprung to life last week with each reporting GDP growth of 0.3% in the second quarter, which ended in June.

That was sharply different from what had been expected. In Germany, the consensus called for a 3.5% quarterly drop in GDP, and in France a 1.3% decline looked likely. The surprise turnaround caused many analysts to project positive third-quarter growth for the Euro zone overall.

Just how strong or weak any recovery may be in the Euro zone is one question. A second is whether Europe or the U.S. is likely to emerge from recession sooner. Recent economic history would suggest that the U.S. is the growth engine that helps carry other regions out of recession. Therefore, since the U.S. went into recession first, it is likely to emerge from recession before most other regions, including Europe.

Now that view is being challenged.

“I think the most important thing that is missing [from analyses of Europe’s economy] is the difference in corporate governance,” says Franklin Allen, Wharton finance professor. “In the U.S., firms are operated in the shareholders’ interest. When tough times come, managers lay off workers and maintain dividends as much as possible.” This recession is a perfect example of that approach and the effect “has been dramatic” – with the U.S. unemployment rate doubling since the start of the crisis in 2007.

Structurally, France and Germany “are much more stakeholder- and, in particular, employee-oriented,” Allen points out. “When the tough times come, [these countries] cut dividends and maintain employment.” The drop in German GDP has been much larger than the drop in the U.S., yet in Germany “unemployment is about where it was at the start of the crisis. It first actually fell and then rose.” In France, the fall in GDP was less than in the U.S, but, nevertheless, “the unemployment rate in France is again about where it was at the start of the crisis.

“In the good times, the U.S. system works well because it allows labor to be reallocated easily. The European countries have had a problem in that the adjustment is much slower,” Allen says. In the bad times, however, the U.S. risks instability because the large rise in unemployment has a chilling effect on the economy. “This is what I believe is now happening. France and Germany are emerging from the recession faster than the U.S."

Other analysts have pointed out that Europe’s extensive social safety net system can act as an automatic economic buffer – a form of stimulus that keeps more money in the hands of workers even if they were to be laid off. That reduces the need for more formal fiscal stimulus plans of the kind and size now seen in the U.S.

Meantime, while the strength of the turnaround was welcome, some observers say the surprisingly good numbers should be interpreted with caution. For one thing, Germany and France have their own temporary cash-for-clunker type auto-exchange programs – similar to that of the U.S. – which are thought to have bumped up the GDP figures. In fact, the German program is even stronger than the U.S. clunker program.

“Things have gotten so bad that almost any positive bit of news is taken as an indication of light at the end of the tunnel,” says Wharton management professor Mauro Guillén, head of the school's Lauder Institute. “As economic activity falls, it becomes more likely that the rate of decline will slow down and there will be … a rebound. The issue is how much of a rebound and how lasting?” Guillén remains “slightly pessimistic about Euro zone prospects: Banks are still experiencing growth in defaults, credit is scarce, consumers are wary and unemployment has not peaked. The recovery will be slow, long and painful.” And as for clunker-type programs and other government spending measures, Guillén adds, “the fiscal stimuli cannot last forever, and deficits are mounting. There’s too much uncertainty about when the turning points will happen; as a result, people are not making big decisions. It takes a while to deleverage. We still have a long way to go.”

Other analysts note that while German and French exports have begun to pick up, much of the improvement for the second quarter probably results from a drop in imports by both countries, which helps raise GDP numbers.

Nothing to Smile About: Patients Decline Dental Treatments in a Tough Economy

Earlier this year, the Chicago Tribune reported on a survey of 300 Chicago-area dentists who indicated that, during these difficult economic times, patients are tending not to put their money where their mouths are.  Sixty percent of the dentists said that elective cosmetic treatments -- such as crowns -- are considerably lower on their patients’ priority lists, and 40% indicated that even preventative visits are slipping as people find themselves out of work and lacking dental coverage.

This week, The Wall Street Journal reported that “a little more than half of 1,275 dentists surveyed in July by the American Dental Association said their net incomes have decreased and their unbooked [time has] increased from the first quarter.” 

But some dentists are fighting this trend, the Journal article noted, by marketing their services in ways they haven’t needed to before -- sending email newsletters, mailing hand-written reminder notices or calling patients to encourage them to schedule regular cleanings. One dentist who was interviewed even joined Twitter to keep in touch with patients. (A sample tweet, cited by the Journal: “Check out our latest implant surgery video to stabilize loose dentures.”)

And for those who have lost their jobs, more motivated dentists are offering installment payment plans to cover more costly procedures.

Ironically, the dip in high-price cosmetic treatments comes at a time when many could use them: Most recruitment experts agree that when it comes to seeking jobs, image matters. A healthy smile is often associated with youthfulness, the perception of which can give a job candidate a boost. In fact, in a recent article titled, “Take 10 Years Off Your Image,” posted on TheLadders.com -- a web site advertising jobs that offer salaries of $100,000 and above -- the number-one rule is to have a whiter smile. But that may not help dentists: The article suggests that readers use do-it-yourself Crest Whitestrips.

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Loophole in Swiss Offshore Banking Closed -- Wealthy Americans Face More Scrutiny

Thousands of wealthy American investors will be checking with their financial advisors this week on the implications of an agreement between the U.S. government and UBS, the large Swiss bank, to turn tax records over to American regulators.

It is understood that the tentative agreement, initialed this week and set for final approval next week, will lead UBS to release the financial records of thousands of Americans suspected of using Swiss wealth management accounts to evade taxes by hiding assets. Earlier this year, UBS agreed to pay $780 million to the U.S. to settle tax evasion charges.

“Hopefully, this will mark the end of offshore banking designed to help citizens of other countries evade taxes,” says Wharton finance professor Franklin Allen, who added that final judgment should await the formal signing of the agreement.

Allen calls it unacceptable for one country’s banks to use tax avoidance in another country as a “comparative advantage and selling point.” While it is difficult to tell just how the new rules will affect the highly sophisticated offshore banking industry overall, it may just take them in stride, he added. One big question remaining is whether countries that specialize in offshore banking “will still be willing to take funds from dictators and criminals.… This will be the next big issue in this area, hopefully.”

Wharton operations and information management professor Maurice Schweitzer says, “This is a watershed moment for offshore banking” and bad news for wealthy Americans who have evaded taxes. “For the rest of us, this levels the playing field.” In the past, Switzerland had the world’s most credible reputation for banking secrecy. Now taxpayers “are on notice that no banking transaction is beyond the view of the U.S. government.”

Until recently, UBS, along with the Swiss government, argued that releasing such tax records would violate bilateral tax agreements and Swiss law. Then, earlier this year, Switzerland agreed to do away with the strict distinction between tax fraud and tax evasion. Tax fraud has always been treated as a crime under Swiss law, but until now tax evasion was considered a civil offense. And until recently, the Swiss government’s bank secrecy policies had steadfastly prevented the release of any financial records with the exception of clear cases of tax fraud.

Wharton legal studies professor Philip Nichols says that Swiss banking rules generally “frown on the use of accounts for illegal purposes, so a fairly strong argument existed that they would have had to disclose a fair amount of information anyway.” Swiss banking does not want to accrue the type of reputation thrown at, for example, Lichtenstein within Europe, Nichols adds. “But holding out as long as they did gave them a better bargaining position and preserved some of their reputation.”

Regarding the future of Swiss banking, “they have an unparalleled global brand and a great number of clients who are not in the slightest bit worried about what the United States does," Nichols points out. “I have not heard of anyone who has reacted to the disclosure of U.S. clients by withdrawing their own monies. There are a lot of clients whose governments are decades away from applying pressure to the Swiss government.”

The latest agreement is said to have the potential to affect more than 50,000 wealthy Americans.

More from Knowledge@Wharton:

The Other Banking Drama: Those Secret Swiss Accounts

Shaken and Stirred: Brioni Makes Up for Loss of James Bond Account with New Foray into Casual

Famous for exclusive and expensive formal wear since its establishment in 1945, Italian fashion house Brioni is making up for a downturn in the luxury goods market by starting to offer hand-stitched T-shirts, among other items, according to an article in The New York Times.

Brioni, at one time the designer of James Bond suits, is facing the same challenges as other high-end designers. Its solution is to increase its appeal to new, younger buyers as well as to its traditional but now more cost-conscious wealthy customers, the article notes, adding that in the past, company tailors have made suits and tuxedos for Nelson Mandela, Donald Trump and Prince Andrew, among others. “Even if you are committed to your heritage, you have to be aware of where the market is going,” states Andrea Perrone, whose grandfather co-founded the privately held fashion house.

Three years ago, the article adds, casual clothes made up 15% to 20% of the company’s sales; they now total 30% to 40% of sales and are expected eventually to provide 50%. In addition, the company is expanding into emerging markets like Russia, the Middle East, India and China as a way to reduce its dependence on sales in the slumping U.S. market.

A recent article in Knowledge@Wharton foreshadowed Brioni’s strategy: “As 2009 shapes up to be the most challenging year in more than a generation for luxury items such as high-end apparel and fragrances, marketers [are planning] to target aspirational 16-year-olds and [are] expanding rapidly into the new money hubs of Russia and the United Arab Emirates,” the article stated.

For other Knowledge@Wharton articles on the luxury goods market, see:

 Luxury Fashion Executive Domenico De Sole: 'Stay the Course with the Brand'

Firms Bet on Innovation While Preserving Tradition

What Goes up Must Come Down: The Incredible Shrinking – and Growing -- Snack Package

Consumers have complained for years about packaged snack makers shrinking the size of their offerings. Now, the average package size for many popular snack foods – such as Doritos -- has been expanding, like a waistline gone wild.

The reversal stems mainly from two factors, notes an article from the AP: First, recent high prices for ingredients are easing and second, offering more product for the money helps premium-priced brands retain customers, who often trade down in rough economic times.

Many flavors of Doritos corn chips, for example, now come in 14.5 oz. bags, up from the 12-oz. packages offered recently. That’s quite a reversal from last year at this time, when rising ingredient prices led to smaller offerings -- and to articles such as "The Incredible Shrinking Doritos Bag."

With all this growing and shrinking of packages, wouldn’t it just be easier to change prices instead? For snack makers, the answer is a resounding “no.” People tend to remember prices more than quantity, says Wharton marketing professor David R. Bell. So snack makers tend to prefer to increase the amount of product in a package and keep the price constant when the price of ingredients is falling. Were they to cut prices, customers would get used to them and it would then be very difficult to raise prices back up, Bell says. When prices for inputs – or ingredients -- are rising, the reverse holds. Snack makers prefer to shrink serving sizes rather than raise prices, which would spark a stronger customer reaction.

Eric T. Bradlow, also a Wharton marketing professor, agrees that it can turn customers off to lower prices, then later try to push them back up. And cutting prices has other costs: It can lead to a “prisoner’s dilemma for companies, where you and your competition drop prices and consumers win, not the firms.” What’s more, the marginal cost of increasing size by 10% is much less than lowering prices 10% due to fixed costs, he adds. Further, Bradlow notes a “little known” fact: Increasing package size tends to increase overall consumption, “so that people who have more on hand consume more, possibly in the long run,” offering other potential gains to the firm.

When costs are rising and snack makers decide to shrink the unit size, they should ensure that the shrunken offering falls within a “latitude of acceptance," where consumers do not register the change. Within a limited range of package size, customers generally do not compute unit prices, Bell points out.

Still, there are risks to manufacturers that toy with product quantities. After all, increasing the package size -- the value approach -- relies on touting the importance of quantities “by announcing ‘20% more chips,’ and making sure this registers with consumers,” Bell says. Manufacturers want the message to register but not for very long, because if the quantity message "sticks," then firms might also find it difficult to return packages to their usual volume size.

And since some consumers might want to limit their consumption of these snacks, Bell thinks it might be interesting to offer the larger and regular package sizes at the same time -- and at the same price. Later, “when appropriate, simply eliminate the larger product from the product line. That could help eliminate the possibility of the negative attribution, ‘Hey, my bag of chips just got smaller!’”