Kristin Kiesel

1
Lecture 12 Food Consumption and Labeling
Policies

• Kristin Kiesel
• UC Berkeley

2
Motivation and Outline

• Information provision as alternative policy tool
  to address externalities
• Organic labeling
• Nutritional labeling and the food guide pyramid
• (non-biotech or non-GMO labeling)
• Policy context as determinant of success
• Food consumption
• Interdependencies with marketing efforts and
  media coverage

3
Objective

• Does availability of information insure that it
  will be incorporated into consumer behavior?
• If not, which aspects of informational changes
  under labeling regulations are most effective in
  altering consumer behavior?
• A better understanding of the interplay between
  regulation, media coverage, and product
  marketing helps determine which regulatory tools
  best serve consumers interest and policy
  objectives at the same time

4
Food Consumption

• For any policy evaluation, its history and
  context need to be well understood
• Traditional analysis of food demand
• Two influential models in analysis of
  additional aspects
• Additional determinants of individual food
  consumption
• General trends in food consumption

5
Traditional Analysis of Food Demand

• Food demand depends on
• quality (nutritional value, taste, food safety)
• prices and income
• Increase in prices lead to reduction in
  consumption
• (law of demand)
• Impacts of income on consumption
• Luxury goods increase in income results in more
  than proportional increase in consumption (filet
  mignon)
• Normal good increase in income results in less
  than proportional increase in consumption
  (cheese)
• Inferior good increase in income results in
  reduction in consumption (canned peas)
• Illustration 5 increase in income will increase
  consumption of filet mignon by 8, increase in
  consumption of cheese by 4, and reduce canned
  peas consumption by 7

6
Traditional Analysis of Food Demand (cont.)

• The demand for a specific food product depends on
  the price of other food products
• Complements (peanut butter and jelly, bread and
  butter)
• increase in price of one will reduce the demand
  for the other (higher peanut butter price will
  reduce demand for jam)
• Substitutes (butter and margarine, corn syrup
  and sugar)
• increase in price of one will increase the
  demand for the other (higher butter prices will
  increase the demand for margarine).

7
Traditional Analysis of Food Demand (cont.)

• Seasonality and availability constraints
• Turkey demand surges at Thanksgiving
• Prices and quality of fruits and vegetables
• Additionally, most people shop at a particular
  supermarket, limiting their range to the
  assortment of that store

Prices of fruits and vegetables are lowest in the
midst of season when the quality is best
price
Middle of season
Time
8
Two Influential Theoretical Models

• Household production function (Becker 1965,
  Lancaster 1966)
• Logic of production functions applied to consumer
  side products are purchased in the market as
  inputs, and utility is derived from attributes
  after some transformation (e.g. labor, time)
• Important concept of opportunity costs of time
• Hedonic price functions (Rosen 1974)
• Allows consideration of differentiated goods
  through a value (price) function that depends on
  specific amount of product characteristics

9
Household Production Models A Modern Approach to
Food Demand

• Families purchase food products, and use
  equipment and time to produce meals
• (eggs versus omelet)
• The demand for food depends on household
  composition and labor market considerations
• Increased participation of women in labor force
  lead to increased demand for
• Precut meats and salads
• Ready to eat meals
• Food outside of home (restaurants)

10
Hedonic Models Whats in the price of food?

• Hedonic price function a product price is the
  sum of monetary valuation of each of its
  attributes
• Price of food bundles payments for
• Health (nutritional content)
• Quality and taste
• Convenience
• Example a 15 entry at a restaurant reflects
• 5 nutritional components (calories, protein,
  vitamins, etc.),
• 4 quality and taste (specific preparation,
  seasoning, etc. ),
• 3 convenience, and 3 atmosphere
• Two main trends increased willingness to pay for
  convenience and taste (quality)

11
The Power of the Consumer

• Only about 17 of new food products introduced in
  retail market succeed
• Costs of failure are high as introduction of a
  new product nationally is 5-10 million or more
  (Asp 1999)
• Heterogeneity in preferences as important
• factor of food consumption
• Implications for marketing, labeling,
• certification, and technology adoption
• Factors affecting consumer demand beyond
• classical determinants not well understood
• and important area of research
• Food consumption as possible political statement
  and new level of consumer-producer discourse
  (Puis 2000)

12
Lifestyle, Family Dynamics, and Cooking Skills

• Food habits (cultural standardized set of
  behavior) and lifestyle as determinants of food
  demand
• Family dynamics
• Women tend to have more control over food choices
  
• The cook and the grocery shopper determine food
  purchases Less convenience food is purchased
  when the shopper is not the cook (when wife cooks
  and the husband shops, he is less likely to buy
  precut chicken than when she shops)
• Eating habits of children in household influence
  food choices (e.g. picky eater)
• More skilled and appreciative cooks will buy less
  pre-processed food like precut vegetables (e.g.
  slow food movement)

13
Beliefs, Attitudes, and Perceptions

• Religious and ethical beliefs, social and
  environmental considerations can further
  establish norms and constraints in food
  consumption
• Friday penance by Catholics (required meat
  abstinence) after announcement by Pope Paul VI
  (1966) that it is not binding, Friday fish
  consumption declined drastically
• Kosher food for Jewish, and halal meats for
  Muslims
• Vegetarian, vegan eating habits
• non-biotech and organic preferences
• Economic relevance
• Better understanding of consumer behavior
• Policy implications

14
Established and Emerging Food Trends

• Convenient foods
• Fresh foods
• Ethnic foods
• Fusion foods
• Prepared home meal replacements
• Food mixtures
• Natural and organic food
• Health promoting foods (e.g. probiotics)
• Physical performance foods

15
Regulatory Settings

• Two types of informational policies
• 1. Reactive policies In response to food trends
• Regulation to ensure consistent and truthful
  information provision to consumer
• Development of standards, rules and certification
  (e.g. National Organic Program)
• Beliefs and perceptions can be invoked and
  strengthened by regulation
• 2. Proactive policies Aimed at influencing food
  trends
• Regulation to provide information aimed at
  directly affecting consumption patterns (e.g.
  Nutritional Labeling and Food Guide Pyramid)
• Attitudes and beliefs affect regulatory goals

16
The National Organic Program (NOP)

• The U.S. organic market is projected to reach a
  value of 30.7 billion by 2007, with a five-year
  compound annual growth rate of 21.4 percent
  between 2002 and 2007, (Organic Trade
  Association)
• One of the fastest-growing categories in food
  business.
• Nearly two thirds of U.S. Consumers bought
  organic foods and beverages in 2005 (Consumer
  Reports 2006, CR).
• Organic products sell at a significant price
  premium compared to their conventional
  counterparts at 50 on average which prices often
  doubling for milk and meats (CR 2006).
• Organic Foods Production Act (OFPA) of 1990
  required the USDA to develop a national standard
  to assure consumers that agricultural products
  marketed as organic meet consistent, uniform
  standards
• National organic standard and labeling
  regulations for organically produced agricultural
  products became effective in October 2002

17
What is Organic Food?

• Definition (from National Organic Program
  website, USDA)
• Organic food is produced by farmers who
  emphasize the use of renewable resources and the
  conservation of soil and water to enhance
  environmental quality for future generations. 
  Organic meat, poultry, eggs, and dairy products
  come from animals that are given no antibiotics
  or growth hormones.  Organic food is produced
  without using most conventional pesticides
  fertilizers made with synthetic ingredients or
  sewage sludge bioengineering or ionizing
  radiation.  Before a product can be labeled
  "organic," a Government-approved certifier
  inspects the farm where the food is grown to make
  sure the farmer is following all the rules
  necessary to meet USDA organic standards. 
  Companies that handle or process organic food
  before it gets to your local
• supermarket or restaurant must be certified
  too.
• Addresses positive environmental externalities
  of
• consuming organic food

18
What is Organic Food? (cont.)

• USDA makes no claims that organically produced
  food is safer or more nutritious than
  conventionally produced food
• Little or no scientific evidence on enhanced
  nutritional value or health benefits (e.g.
  Williams 2000)
• In many studies top motives to buy organic are
  taste, food safety and health concerns
• Example organic dairy (McEachern and McClean
  2002) purchase motivations
• Improved taste (30)
• Food safety (24)
• Health benefits (17)
• Environmental concern (16)
• Ethical concerns (10)
• These perceptions might be reinforced by
  USDA-label
• Attracts attention to attribute
• Might suggest potential benefits or risks that
  make it worth pointing out
• Acts as an anchor and/or adds intrinsic value
  (Kahneman and Twersky 2000, Ariely , Loewenstein
  and Prelec 2003)

19
Cost-Benefit Analysis of the NOP

• How do we go about evaluating the NOP?
• 1. How do we measure the costs?
• 2. How do we measure the benefits?
• How do we account for heterogeneous preferences?
• What if consumers choose organic products for the
  wrong reason?
• How do we account for different informational
  aspects such as media coverage, marketing
  efforts, and actual
• labeling change?
• Do we see growth because of changes in
  regulations or were
• changes in regulations a result of growth ?

20
My research Milk is Milk?

• 1. How does the implementation of the NOP and
  changes in information provision affect consumer
  preferences for organically produced milk?
• 2. Do these effects vary across consumer
  segments differentiated by both heterogeneous
  preferences and heterogeneity in prior knowledge
  and information costs?
• 3. How much did consumer benefit from these
  regulatory changes and how are these benefits
  distributed across consumer segments?
• 4. How do changes in purchase behavior relate to
  different aspects of the information changes,
  such as prior media coverage of regulatory
  changes and actual appearance of the USDA organic
  seal on milk containers?
• Preliminary results indicate a increased
  probability of organic milk purchase after the
  appearance of the USDA seal.
• The hedonic price function approach as well as
  simulations within discrete choice models suggest
  that consumers value the changes in labeling
  regulations.
• A positive relation between organic milk sales
  relative to total milk sales and media coverage
  prior to the appearance of the USDA organic seal
  is detected.

21
Nutritional Labeling and the Food Guide Pyramid

• What is the externality addressed with
  these regulations?
• Nutrition, Labeling, and Education Act of 1990
  gave FDA authority to require nutrition labeling
  of most foods
• In April 1992 USDAs Eating right pyramid
• released after a year of controversy and
• 855.000 additional spending
• In February 2006 USDA unveils revised food
• pyramid

22
The Food Pyramid of to a Bad Start

• In April 199, printing of the eating right
  pyramid was blocked due to opposition from meat
  and dairy industry
• final version preferred version by meat and
• dairy industry (non-hierarchical)
• Media coverage of the political background paints
  a picture of politics versus sciences

23
Related Research Findings

• Purchase behavior changed, but purchase of
  healthy products increased only in some
  categories (e.g. Teisl, Bockstael, and Levy 2001)
• Nutritional labeling has reduced
• and narrowed focus on nutrition in
• advertisement
• (e.g. Ippolito and Pappalardo 2002)

24
Back to Food Consumption
25
Conclusions

• Some critics say that organic labels takes
  attention away from health problems related to
  obesity and other nutritional issues
• But, evaluation of organic labeling might provide
  a better understanding of successful aspects of
  informational regulation and ultimately allow to
  design better health and environmental related
  informational policies