All Food is Not Created Equal Policy for Agricultural Product Differentiation

1. All Food is Not Created EqualPolicy for Agricultural Product Differentiation Jill McCluskey and Elise Golan

2. Role of Government in Changing Food Markets • Explosion of differentiated products • new demands • new technologies • new industry structures • New role for Government?

3. 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

4. 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

5. 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”

6. Policy Intervention: Certification and Accreditation • Certifying private standards • high quality justifies intervention? • Certifying the certifiers • Certifying testing methodologies

7. 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?

8. 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?

9. 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

10. 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.

11. 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. • Partial consistency: equal parameters, but differences in terms of variances

12. 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.

13. 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.

14. 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