There are no brand names. There is no fancy packaging. Shoppers do all the work of scooping and bagging themselves. So it must be cheaper, right?

Many grocery stores have a bulk food section, where shoppers scoop flour or nuts or spices from big bins into little plastic bags, and then take them up to the cash, where each individual purchase is weighed and priced.

A few months ago I went searching for whole grain, whole wheat flour. And I noticed something strange.

The flour in the bulk food section was $0.69 per 100g/$3.14 per pound. The flour on the shelves was $9.99 for 2.5 kg, or about $0.40 per 100 grams (see the pictures). How could that be?

Actually, there is a simple economic explanation [which may not be right - see comments below].

There are, roughly speaking, two types of flour purchasers. There are heavy flour users, people who make their own bread, muffins and cookies on a weekly or a daily basis. And there are light users- people who use flour only on special occasions, like making a scratch quiche for a dinner party, or baking cookies to impress or seduce.

When a heavy flour user walks into a grocery store, his demand for flour is relatively elastic - the amount of flour he's willing to purchase responds a great deal to the price of flour. If flour is on sale at a good price, he might buy several kilos, and store it for future use. If a grocery store sells only expensive flour, it's worth his while to go somewhere else. When a person buys flour in 10 kg bags, it's worth shopping around a bit to save $1 per kilogram.

When a light flour user walks into a grocery store, her demand is typically relatively inelastic - that is, relatively insensitive to the price of flour. She needs the flour for her quiche crust tonight, not next week. Moreover, since a quiche crust only takes about 250 grams of flour, there is little point in shopping around. Even if she can get flour for $1 per kg less elsewhere, that's only 25 cents - not worth driving for.

A grocery store can increase its profits if it can find some way of separating out the heavy flour users and the light flour users, and charging the light users more. That's where the bulk food section comes in.The bulk food section allows shoppers to purchase as much or as little as they like, which makes it attractive to people who only wish to make a small purchase. Having lured the light users in with convenience and flexibility, the grocery store can then jack up its prices. It is not easy to compare prices between the bulk food section and the packaged-stuff-on-shelves section, partly because the two sections of the store are some distance apart, and partly because the goods are priced differently ($9.99 per bag v. $0.69 per 100 grams). The heavy users will (probably) notice, because they (probably) know more or less what the going market rate for flour is. Light users won't.

Here is a picture:





A price discriminating grocery store separates out the two groups of customers - the ones with more elastic demands and the ones with less elastic demands. It figures out how much it wants to sell by setting marginal revenue equal to marginal costs, and charges the maximum people are prepared to pay for that quantity. Bulk food sections are one way of separating out customers, but not the only way. In Canadian grocery stores, "ethnic" food sections often sell beans, spices, coconut milk and Ribena at a lower price than is charged for almost exactly the same product in the same store. Not all ethnic foods sections are cheap, however - Walmart's "British foods" section sells special, extra-expensive, imported-from-the-old-country baked beans. "Natural foods" sections are another way of selling slightly differentiated products at a highly differentiated prices. They're all forms of price discrimination.

Update: As noted in the comments below, this price discrimination explanation assumes that grocery stores have some degree of market power. Price discrimination can't happen when sellers are operating in an environment where competition between grocery stores means that everyone cuts prices to the point where they are just covering costs. An alternative explanation for the higher price of scoop-your-own "bulk" food is that distributing food this way is actually more expensive, because of spoilage, snackage, and the cost of individually weighing out each purchase. However people who only want a small quantity of some foodstuff are willing to pay a higher per-unit price for scoop-your-own, because it works out to be less expensive in the long run than buying a big package, most of which will end up being wasted. When price differentials are driven by cost differentials, the diagram would look more like this:

Does all of this mean that it's unwise to shop at Bulk Barn, or to purchase food from the bulk section of the grocery store? No. Not everything is more expensive in the bulk bins. And even when it is, it can be cheaper in the long run to buy a small quantity of food at a high per unit price than to buy a large quantity of food - most of which will go unused - at a low per unit price.

Just understand what you're paying - and why.