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Explore government intervention justifications, policy interventions, and research directions in agricultural product differentiation. Evaluate impact on market outcomes, consumer behavior, and firm practices.
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All Food is Not Created EqualPolicy 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. • Partial consistency: equal parameters, but differences in terms of variances
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