Valuing Food Attributes: Experimental Auctions and Sensory Analysis

1. Valuing Food Attributes: Experimental Auctions and Sensory Analysis Marin Bozic - University of Minnesota Presented at the Food Science Department North Carolina State University, June 11, 2012

2. Travel back in time to 1992….

3. 1992: Will consumers accept rBST? • Smith and Warland (1992) – survey of 11 consumer studies: an average of 57% of respondents views rBST negatively • Hoban and Kendall (1992) – national telephone survey of 1200 adults: fewer than half accepted biotechnology for increased milk production • Based on surveys, analysts expected 4-20% decline in consumption of fluid milk upon rBST introduction • But… should we trust hypothetical surveys?

4. Compulsion to Drink Experiment • A experiment with tangible consequences… • Each subject was given a glass of “rBSTmilk” • In order to be compensated, they either had to bid to exchange for “rBST-free milk”, or drink the glass they had

5. Experiment run from coast to coast

6. Group dynamics and the effect of information • 10 bidding rounds where initially conducted. • After 10th round, a neutral description of rBST was read aloud. • At round 20, 70% indicated WTP the product at no or small discount

7. What happened in the end? • Initial consumption reaction to rBST introduction was minimal • Product differentiation (“rBST free”) emerged to cater to niche markets • Study by Foltz (2005) – market share for rBST-free in single digits • Today – a dramatic reversal in fluid milk market

8. Plan for today • Toolbox Revisited: Overview of methods food science and marketing/economics uses to understand consumer preferences • The Promise of Experimental Auctions (EA) • Auctions in Action: what have we learned about dairy products • New Product Development: When should food scientists and marketing team work together • EA with Fluid Milk: Outline of my research

9. Why we need to understand consumer behavior • New product development and pricing strategy • Advising public policy • Guiding and valuing fundamental research

10. Revealed vs. Stated Preferences

11. Evaluating willingness-to-pay for new goods • Self-stated WTP • Contingent Valuation • Conjoint analysis • Experimental auctions

12. Would you pay what you say? • Do consumers have an incentive to reveal their true preferences? • Lack of interest in the experiment • Desirability bias (social reputation, experimenter effect) • Strategic behavior • Solution: Separate what people say and what they must pay.

13. The Promise of Experimental Auctions • Consumer choices are consequential.Real money is exchanged for real goods. • EA are designed to incentivize subjects to reveal their true preferences • Experimental design penalizes strategic behavior • Key element: Final price a person must pay is not dependent on what the person indicated as their WTP

14. A lottery approach (Becker-DeGroot-Marschak Mechanism) • BDM Mechanism has three defining steps: • 1) Subjects submit their statement on maximum WTP for a good • 2) A price is randomly drawn from a previously explained uniform distribution and announced to experiment participants. • 3) All subjects that submitted WTP that turned out to be higher than the randomly drawn price must buy the product, and pay the announced price, not the WTP they indicated.

15. A lottery approach (Becker-DeGroot-Marschak Mechanism) • BDM Mechanism is incentive compatible. • If they submit WTP that is too high, they might have to pay for the product more than they value it (if the random price turns out to be higher then their true WTP, but lower then their expressed WTP.) • If they submit WTP that is lower than their true value they might miss the opportunity to buy the product that was good value-for-money(if the price is drawn lower than their true value, but higher than submitted WTP)

16. Second-price Auction (Vickrey) Basic Vickrey Second-price auction steps: Participants are assembled in a group, and asked to submit sealed bids for one product. Only the highest bidder gets to buy the product, and he or she must pay the price equal to second-highestbid. As in BDM mechanism, it’s not possible to “game” the system by strategic bidding.

17. Variation on the theme English auction N-th price auctions Random n-th price auctions Multiple rounds with increase in information/experience with goods, with only one round binding BDM/Vickrey with “endowment/upgrade” setup CLT vs point-of-purchase Repeated treatments

18. Simulating market shares Simulating own-price and cross-price elasticities Identify product attributes that generate higher bids Identify consumer classes (factor analysis) What can we use auction bids for?

19. Using Auction Bids: Demand Curves

20. Organic is a bag of attributes (Bernard & Bernard, 2009) Bids for rBST-free + antibiotics-free = bid for organic Is there a point in paying for organic feed? “All-natural” products may have a big marketing opportunity. What have we learned about dairy products from experimental auctions?

21. What have we learned about dairy products from experimental auctions? Effects of new product introduction Brand switching Cannibalization Category expansion Stigmatization (Kanter et al, 2009) New products redefine the existing ones.

22. What have we learned about dairy products from experimental auctions? Sensory acceptability mitigates WTP for animal welfare in yogurts (Italy) Consumers may be forming sensory expectations based on production-method labels Products promising superior production-methods may not succeed if not matched with superior taste (Napolitano, 2008)

23. Criticisms of ExperimentalAuctions • Home-grown vs. “affiliated” values • Does not mimic the consumer purchase process • Expensive, labor intensive, cumbersome • Off-margin bidders quickly lose interest in Vickrey auctions • Revealed preference for pricing research – conjoint analysis still by far the most widely used technique

24. New Product Development Process

25. How should food scientists and economists collaborate? It boils down to this: is anything lost when price-point analysis is separated in product development from sensory analysis? Cost-impact of important ingredients How does ‘liking’ score translate to willingness-to-pay in auctions? Can check-all-that-apply (CATA) approach be used to infer determinants of WTP, rather than just acceptability score? Does product “story” change how sensory attributes are scored by consumers? Can “story” carry higher WTP if there is no “signature” on sensory attributes?

26. UMN-ISU Experimental Auctions with Fluid Milk Sensory aspect: Do consumers prefer flavor of milk from cartons or plastic jugs? Economic aspect: Are consumers willing to pay more for a “certified fresh taste” milk? I.e. non-oxidx

27. Experiment Design Three-stage second-price auction “Blind WTP” - package, milkfat (2x2) 2) Information phase - information on oxidation read - offer to buy “certified fresh” milk in both type of packaging 3) Sensory phase -forced-choice assessment - auction with tastes revealed - 2 and 3 interchanged

28. I. Pre-information auction • First, each of you has been given a bid sheet in your packet (PINK). On this sheet you will, in a moment, write the most you are willing to pay to for each of the following: • skim milk, in paperboard carton • skim milk, in plastic jug • Reduced fat milk, in paperboard carton • Reduced fat milk, in plastic jug

29. Scenario A: Information-first experience Scenario B: Sensory-first experience Subjects split to two treatments

30. Oxidation information • Oxidation is a process that causes milk to develop flavor defects. Light initiate a chemical reaction in milk that modifies specific components of proteins and fats which results in characteristic off-flavors. Exposure to light for as little as 10 minutes is sufficient enough to cause the defect. The closer the milk is to the light source the quicker the off-flavor develops. Not only is flavor affected, but certain vitamins riboflavin and vitamin A are susceptible to light induced degradation.  Oxidation can be also be induced by metals like copper or iron. The off-flavor has been described as "cardboard" or mouth-drying. Milk packaged in paperboard does not allow this process to occur.  With that information in mind, we ask you to place your bids on the 4 packages in front of you…

31. Sensory test • Skim milk, from paperboard carton 119 • Skim milk, from plastic jug 287 • Reduced fat milk, from paperboard carton 078 • Reduced fat milk, from plastic jug 113 • Subjects are given two additional samples to try, that would be introduced to them as “CERTIFIED FRESH” skim and reduced fat milks. In reality those would be just skim and reduced fat milks from cartons, but that information would not be revealed to subjects. [this part is done after post-sensory auction for sensory-first treatment; and before post-sensory auction for information-first treatment]

32. Scenario A: II. Post-information instruction • First, each of you has been given a bid sheet in your packet (PINK). On this sheet you will, in a moment, write the most you are willing to pay to for each of the following: • skim milk, in paperboard carton, regular • skim milk, in plastic jug, regular • reduced fat milk, in paperboard carton, regular • reduced fat milk, in plastic jug, regular • skim milk, in paperboard carton, certified fresh taste • skim milk, in plastic jug, certified fresh taste • reduced fat milk, in paperboard carton, certified fresh taste • reduced fat milk, in plastic jug, certified fresh taste.

33. Scenario A: III. Post-sensory auction • First, each of you has been given a bid sheet in your packet (PINK). On this sheet you will, in a moment, write the most you are willing to pay to for each of the following: • skim milk, in paperboard carton, regular • skim milk, in plastic jug, regular • reduced fat milk, in paperboard carton, regular • reduced fat milk, in plastic jug, regular • skim milk, in paperboard carton, certified fresh taste • skim milk, in plastic jug, certified fresh taste • reduced fat milk, in paperboard carton, certified fresh taste • reduced fat milk, in plastic jug, certified fresh taste.

34. Scenario B: II. Post-sensory auction • First, each of you has been given a bid sheet in your packet (PINK). On this sheet you will, in a moment, write the most you are willing to pay to for each of the following: • Skim milk, paperboard carton, tastes like sample 119 • Skim milk, paperboard carton, tastes like sample 287 • Skim milk, plastic jug, tastes like sample 119 • Skim milk, plastic jug, tastes like sample 287 • Reduced fat milk, paperboard carton, tastes like sample 078 • Reduced fat milk, paperboard carton tastes like sample 113 • Reduced fat milk, plastic jug, tastes like sample 078 • Reduced fat milk, plastic jug, tastes like s sample 113

35. Scenario B: III. Post-information instruction • First, each of you has been given a bid sheet in your packet (PINK). On this sheet you will, in a moment, write the most you are willing to pay to for each of the following: • skim milk, in paperboard carton, regular • skim milk, in plastic jug, regular • Reduced fat milk, in paperboard carton, regular • Reduced fat milk, in plastic jug, regular • skim milk, in paperboard carton, certified fresh taste • skim milk, in plastic jug, certified fresh taste • Reduced fat milk, in paperboard carton, certified fresh taste • Reduced fat milk, in plastic jug, certified fresh taste.

36. Analysis • Do people indicate preference for a milk taste from a particular packaging • Are consumers willing to pay a premium for “certified fresh taste”? • What are the drivers of WTP? • What is the return to R&D for jug-like packaging that would completely eliminate oxidation process?

37. Valuing Food Attributes: Experimental Auctions and Sensory Analysis presented at the North Carolina State University, invited seminar in the Food Science Department, June 11, 2012 Dr. Marin Bozic mbozic@umn.edu (612) 624-4746 Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108