Food Marketers and Consumers: Implications of Rationality Asymmetries for Food Choice and Health

1. Food Marketers and Consumers: Implications of Rationality Asymmetries for Food Choice and Health David R. Just Charles H. Dyson School of Applied Economics and Management Cornell University

2. Food Choice and the Rational Man • Food policy is often designed based on the idea that individuals use information efficiently • The consumer will use available information • Can weigh the various consequences of their actions • Gives appropriate weight to vague or narrow information • Individuals make more than 300 food related decision each day • Paying close attention to each would be a waste of time • We naturally fall back on heuristics, habits and rules of thumb

3. The Implications of Heuristic Choice • Heuristics are at best approximations • They are subject to serious error under the wrong conditions • E.g., clean plate rule can be reasonable under some circumstances and not in others • May represent misperceptions • The implication • The consumer makes systematic errors • The consumer could be better off • Cognitive costs are prohibitive

4. Implications of Heuristics • Policymakers can make people better off • Save people from themselves (?) • We need to be careful to separate our preferences from theirs • Could provide a justification for policymakers to impose their preferences • People may resist changes that make them better off • My perceptions are still my perceptions • Widens the set of policy tools • Before: price, information, content regulation • Now: Regulating decision context

5. Some General Principles • Subtle factors can influence choice • Suggestive names, lighting, shapes, colors, image, etc. • Marketers have used this to advantage • In food decisions, much of the problem stems from not being able to monitor consumption • Monitoring consumption requires cognitive resources • Factors that make this task more difficult tend to increase consumption • Individuals distort perceived consumption proportional to serving size • Containers or packaging can make monitoring easier • We are different people when we are distracted

6. An Extended Example: Portion Sizes and Purchasing • A lot has been said about mega-sized portions • Super-size me phenomenon • Long literature documenting the increase in portion sizes since the 70s • Not just in restaurants, but also in home recipes • What is a normal portion size anyway • Soda can – 12 oz • Starbucks – “Tall” 12 oz (no normative size) • McDonald’s soda – “child” 12 oz (medium is 21 oz) • McDonald’s coffee – “small” 12 oz (medium is 16 oz)

7. Normative Portion Sizes • Food marketers put a lot of effort into these normative size names • E.g., Wendy’s offers a Single burger, Double, Triple, a Jr. and a Double Jr. Deluxe (!) • Why do food retailers use such normative language? • Two possible motivations • Informational • Framing

8. Standard Models of Portion Size • Economists propose that different sizes are used to price discriminate • Some value higher quantity, others don’t • Larger quantities are offered at a volume discount • Those who value more benefit from discount • Those who don’t benefit (weakly) from smaller quantity being offered • Profits increase • Quantity determines utility

9. Quantity • Fast Food and Cafeterias • Sizes are usually on display • Sizes are often posted next to the normative names • What extra information could the labels provide? • Information about what others are doing? • Information about what they want you to buy?

10. Framing Effects • Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, whish is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program are as follows: • If Program A is adopted, 200 people will be saved (72%) • If Program B is adopted, there is a 1/3 probability that 600 people will be saved and another 2/3 probability that no people will be saved (28%) • If Program C is adopted, 400 people will die (22%) • If Program D is adopted, there is a 1/3 probability that nobody will die and 2/3 probability that 600 people will die (78%) • How we phrase the question affects the answer (Tversky and Kahneman)

11. Framing Effects • People measure utility against reference points • Lower marginal utility for gains than for losses • Ratio about ½ • Benartzi and Thaler find evidence in stock prices • Tversky and Kahneman suggest that framing impacts are prevalent in consumption decisions. • Normative size names could establish a reference point • Regular is the status quo • Upgrades above not as valuable as downgrades below

12. A Model of Framing Sizes • Suppose individuals solve • Subject to • Where • X is a vector of quantities purchased • C is the set of available quantity choices (including origin) • p (x) is price (possibly nonlinear) • θis a vector of quantities given the normative label

13. A Model of Framing Cont. Loss aversion implies

14. Implications of Framing Claim 1: Let x be any positive consumption quantity available for consumption good i and suppose that the individual displays loss averse preferences. Increasing the reference point must decrease the willingness to pay for x.

15. Implications of Framing Claim 2: Let be any two consumption quantities for a consumption good i and suppose that the individual displays loss averse preferences. If , then increasing θi will increase the willingness to pay for relative to .

16. Implications of Framing Claim 3: Let be the only two positive consumption quantities available for consumption good i and suppose that the individual displays loss averse preferences. Changing the reference point from to may decrease the probability of purchasing either or .

17. Framing • Three hypotheses • Increase norm – ambiguous change in probability of purchase (unless only other choice is 0, then decreases) • Increase norm – increase the WTP to upgrade • Increase norm – decrease WTP for all sizes of goods • Implication for managers • Decrease normative sizes.

18. Our Experiment • Subjects were recruited for a lunch experiment • Cornell Students • Conducted at one of the campus dining facilities • Paid $15, they purchase lunch and keep the change • Items include spaghetti in meat sauce, salad, pudding, rolls, soda and water.

19. Our Experiment • Two different sizes were offered (one twice as large as the other) for • Pudding • Spaghetti • Salad • Sometimes the sizes were labeled “Half” and “Regular” • Sometime they were labeled “Regular” and “Double”

20. Part I: An Auction • 45 Participants (20 Regular/Double, 25 Half/Regular) • All viewed the items before bidding • We ran a special nth price auction for each multiple sized item • Asked for their maximum willingness to pay for the smaller • Asked their maximum additional willingness to pay for the larger • 15th highest bid determines sale price of the larger • 3rd lowest bid determines the smaller

21. Demographic Information

22. Average Bids by Treatment

23. Average Treatment Effects(Controlling for Demographics)

24. Change in WTP for Larger Size

25. CDF of Bids

26. CDF of Bids

27. CDF of Bids

28. Interpretation • There are substantial incentives to name the sizes correctly • Total bids increased from $3.37 to $6.97 (P = 0.00) • The effect was much stronger for the hedonic item • Salad increased in price by 66% and 60% respectively • Pudding increased by 102% and 147% respectively • Spaghetti increased by 105% and 108% respectively • Note on size of bidding pool

29. Interpretation • All bids increase with smaller normative size • This is not consistent with LA • Bids for larger sizes are bigger for regular to double than for half to regular • This is also inconsistent with LA • Hunger attenuates significance (somewhat) • Visceral effects (Loewenstein)?

30. Part II: Cafeteria Purchasing • 134 participants • Same foods and conditions • Participated for 2 weeks • First week only the regular • Second week only the half or the double • Some participants participated only in some weeks • Allows us to check for order effects (none detected)

31. Cafeteria Prices Roll $0.50 Pepsi $1.00 Ginger Ale $1.00 Water $1.00 • Small Spaghetti $2.50 • Large Spaghetti $3.50 • Small Salad $1.50 • Large Salad $2.00 • Small Pudding $1.50 • Large Pudding $2.00

32. Consumption Behavior

33. Controlling for Demographics

34. Change in Average Calories

35. Percent Purchasing

36. Interpreting • People consume more calories when we call it a regular • 32% or 36% depending on size • Probability of purchase goes both ways (only significant up when regular) • Seems to depend on type of dish • LA says decreases • People use size names to determine how much to leave!

37. Implications • Willingness to pay responds to normative language • Significant increases in WTP by lowering norm (like a social norm) • Upgrades more valuable above the norm (violates LA, also inconsistent with social norms) • “Regular” increases purchase only for some foods (like loss aversion) • Do we need another model? • Maybe the label is informative

38. Labels as Information • Individuals respond poorly to visual cues • Can’t estimate size well (tall vs. short) • Respond to plate and utensil size • We eat with our eyes (soup bowls) • What if people use names as a crutch • I know about how much I am willing to pay for a “regular” – but adjust for perceived size • Double that for a double (with some adjustment downward) • Halve it for a half (with some adjustment upward) • Might explain the plate waste

39. Implications for Retailers • Higher WTP for larger names may encourage larger and larger portions • Credibility issues may lead to a treadmill • Responds like an anomaly • Exacerbated by stress, hunger, distractions • Thus, normative sizes more effective in fast food or convenience food • What about more hedonic food?

40. Factors Affecting Food Choice • Cognitive Experiential Self Theory (Epstein, 1993) • Two systems used to evaluate every stimulus • Experiential system makes snap judgments based on affect • Cognitive process makes deliberative evaluations based on rational thinking • Processing resources (time, stress, distractions) determines which rules • When resources are few, convenience, affect, and salience dominate • When resources are many, prices and health information • Hedonic vs. utilitarian foods • “wants” vs. “shoulds” • More willing to acquire a should than give up a want • Significant reactance

41. Consumption and Control Preferences Wealth Cognitive (Low Impact) Primitive Price Price of Substitutes and Complements Attributes (calories, nutrients) Health Information Effort Salience Structure Size of portions Hedonic (Salt, Fat, Sugar) Atmosphere Effort/Availability Distractions Size of portion Shape of containers Manufacturer Control Consumption Decision Individual Control Affective (High Impact) Visceral Factors (hunger) Mental food accounts Commitment Socialization Habit

42. The Role of Marketing • Individuals control some of the important factors • Food manufacturers, retailers and marketers control the majority of factors • Hence, consumption decisions (food and amount) are the result of a game between manufacturers and consumers • Consumers are not entirely aware of their behavior • Marketers are! • Or maybe just behave ‘as if’ • This is a mechanism design problem • Could result in a loss of wellbeing due to incomplete or asymmetric information • Does asymmetric rationality work the same way?

43. The Consumer • The consumer problem can be represented as • Where ϕ is the level of cognitive resources determined exogenously • At least the individual isn’t aware of how their actions affect it • The variable s is an external cue that influences choice, like portion size • The variable q is the choice variable (e.g., quantity) that influences utility (taste and health)

44. Food Manufacturers/Retailers • Food sellers wish to maximize profits • To do this they choose the available cues (S ), prices and the available choices (QS ) • Of course sellers may respond to heuristics also • I assume that over time they happen upon the profit maximizing choice sets • They behave as if they know the consumer’s active preferences

45. A Model of Food Transactions • The producer solves subject to • Here k is the unit for which the individual is charged • Package size, or quantity consumed, etc.

46. Asymmetry of Rationality The seller knows she will receive The consumer behaves as if there is probability ϕ of receiving and probability (1-ϕ) of receiving In actuality the consumer always receives

47. The Impacts of Heuristics • Let • Heuristics are non-trivial if • The most important points: • Consumers are not the only ones who respond to policies • Consumers do not always respond as expected

48. Is it Always Better to be Rational? • The impact on overall welfare also depends on how the heuristic preferences impact profit. • Suppose for instance that individuals are charged for q, costs are monotonic in q and that s is costless (~ denotes fully rational eq) • There are 4 potential cases comparing to fully rational equilibrium • Depends on the relationship of

49. An Example: Portion Size As a simple example, suppose we consider the portion size problem Subject to

50. An Example: Portion Size • Increasing distractions increase portion size, iff • If marginal affective utility is larger than cognitive utility • Affective here refers to the deviation from ex post wellbeing