All Food is Not Created Equal
Policy for Agricultural Product Differentiation
Jill McCluskey and Elise Golan
Role of Government in Changing Food
Markets
Explosion of differentiated products
• new demands
•new technologies
•new industry structures
New role for Government?
Justification for Government Intervention
Farmers’ fear of exploitation by buyers
•“onerous, egregious, and downright illegal
requirements by buyers”
•growing power of retailers - slotting fees,
private label, etc
Consumer concerns (credence attributes)
•is food safe? (bioterrorism)
•does advertised attribute exist?
Unfair competition (fraud)
•Napa Valley wine from China
More Justification
Facilitate trade by reducing search and
transaction costs
•too much information (cell phones and nutrition)
Social objectives
•fair trade, sustainable, free range, slow, etc.
Too much differentiation (the anti-justification)
•spatial models suggest too much product
differentiation
•utility is non-monotonic in choice
Policy Intervention: Grades and Standards
How are mandatory grades and standards set?
•objective safety considerations
•producer driven?
•political/consumer driven?
Do they improve the market outcome?
•unsure because of multiple and confounding
market failures
•not usually but more likely when quality
differences are great and difficult to detect
•“insane for government to help producers to
differentiate”
Policy Intervention: Certification and
Accreditation
Certifying private standards
•high quality justifies intervention?
Certifying the certifiers
Certifying testing methodologies
Policy Intervention: Information
Reveal safety inspection information
•Change consumer behavior? Maybe
•Change firm behavior? Probably
Reveal nutrition information
•Change consumer behavior? Maybe
•Change firm behavior? Probably
Information least distortionary intervention?
•Cost/benefit evidence?
Policy Intervention: Help Consumers Make
the Right Choices
Help consumers interpret information
•smarter consumers - education programs
•smarter information - labeling and adverts
Restrict choice (choice is making us fat)
•Paternalism (food assistance programs)
•Libertarian paternalism (food defaults)
Expand choice (tyranny of the majority)
•stimulate effective demand (WIC)
•subsidize farmers markets, etc.
Construct choice?
Research Directions
Policy
• Mandatory versus voluntary compliance with standards
• Who chooses standards, who monitors: government (which agency?) or private
group
• International trade: barriers to trade vs. consumer sovereignty.
• Free-riding in state agricultural products
• Information overload and scarcity of label real estate
• How product differentiation at the retail level filters down through the food system,
e.g. farmer to retailer obstacles.
• Cost-benefit analysis
Valuation
• Revealed vs. stated preferences
• Choice experiments vs. contingent valuation
• Effects of information supplied to survey participant.
Theory
• Asymmetric information (search, experience, and credence goods)
• Heterogeneity of not well modeled from a consumer point of view (e.g. representative
consumer models)
• Psychological economics (Placebo effect in credence goods?)
• Behavioral economics
Valuation Issues: Revealed vs Stated
Preferences
• Policy makers often must make decisions based
on non-market valuation estimates.
• RP techniques are based on actual behavior but
are indirect and sensitive to model specification.
• SP techniques are direct but hypothetical.
Revealed vs. Stated preferences:
Consistency Across Approaches?
•
•
Intuitive definition of consistency: revealed preferences
agree with stated preferences.
Statistical definitions of consistency are:
–
Complete consistency: equal parameters and equal variances.
Ho :  R   S and  R   S
–
Partial consistency: equal parameters, but differences in terms
of variances
Ho :  R   S
Example: Survey vs. Experiment
• Numbered coupons were linked to numbered
surveys.
• 2 Step model approach
– model stated preferences with a double-bounded
model.
– model actual behavior as a function of stated
preferences and other attributes and socio-economic
characteristics.
• Test whether consumers acted consistently in the market
experiment with their stated preferences.
– Respondents with higher’ stated WTP were more
likely to actually purchase the product.
Valuation: Effects of information supplied
to survey participants
• Studies show individuals place a greater weight
on negative information than on positive
information.
• However, benefit information has a statistically
significant effect on WTP for GM foods.
• Information provision has greater effects for
particular groups of consumers.
• Source information matters.
Additional Research Directions
• Free-rider effect
– branded vs. minimum quality standards
– what’s the threshold size to stop imposing
standards?
• Differentiation by package size
– may explain quantity surcharges
• Psychology and economics
– Placebo effect: utility depends on beliefs