When customers shop, they are more likely to purchase an item priced price ending in 0.99, believing that they are getting a better deal. It’s a well-documented consumer habit, known as left-digit bias.

Retailers are well aware of this bias. That’s why when we roam the grocery aisle, for example, we often see cereal listed for $4.99 instead of $5.00.

But new research by Zachary Zhong, an assistant professor of marketing at the Rotman School of Management, has found that left-digit bias is more than just a customer preference. It’s a consumer habit that could be driving shrinkflation, while also forcing companies and retailers to work together to keep prices low.

“Our overall findings were that it’s much better to change the product than to change the price because the price is something that is hard to change. People pay a lot more attention to the left digit [than to the product itself],” says Zhong.

In the paper “Left-digit bias, shrinkflation and channel coordination,” Zhong and co-author University of Hong Kong’s Xuefeng Peng used a standard economic model that has long been used to study issues around setting prices (such as exploring the relationships between manufacturers and retailers, and how retailers set the prices for a product’s different quality levels). Zhong says the researchers added a “twist” to this model, where they factored in customers’ left-digit bias, as well as the manufacturer, which designs the product’s size and quality, but doesn’t control the end price the retailers set for customers.

When companies face supply chain shocks — when the costs of raw materials, for example increases — they must choose between passing the costs on to customers or reducing packaging size or quality, what’s become known as “shrinkflation.” The researchers found that the deeply ingrained left-digit bias contributes to the shrinkflation phenomenon as retailers are hesitant to raise prices to accommodate the manufacturing cost increases.

“Shrinkflation helps the firm to maintain this .99 ending price, which customers pay a lot of attention to — whereas they don’t pay that much attention to quality and quantity. If the size of toothpaste decreased from 95 grams to 90 grams, customers likely won’t notice,” Zhong says. “But the risk is, if customers do notice you are changing the quality without disclosing that, there’s a much stronger reaction on the consumer side. Anecdotally though, it seems like more companies are getting away with it than getting caught.”

Yet despite the contribution to shrinkflation, Zhong also found that left-digit bias may benefit consumers. The rigidity of pricing forces companies and retailers to come up with different ways to keep prices low when the company faces higher costs — think Costco’s famous $4.99 rotisserie chicken, which changed from a hard plastic container to a plastic bag. While customers might have complaints about the new packaging, they will still happily pay $4.99 for the item.

“There are always other ways for companies to cut costs, maybe through packaging, and that seems to be a better way [than raising prices],” he says.

Other studies have shown that left-digit bias is consistent across all price levels — from the price of gum to the price of a car, Zhong says. With this psychology deeply engrained in consumers, he adds that he isn’t sure that left-digit bias is a consumer habit that can be broken.

And though this bias may be contributing to the rise in shrinkflation, and that consumers can take some action like paying more attention to an item’s per unit price, the research shows that left-digit bias might not necessarily be a bad thing for consumers since it also forces retailers to keep prices the same, he says. “Left-digit bias is not always bad for consumers,” he says. “Sometimes it’s good (because it keeps prices the same), and sometimes it’s bad for consumers (because it contributes to shrinkflation). In the end, it’s not that clean cut.”