Pro-social reputation effects in consumer goods markets

1. Pro-social reputation effects in consumer goods markets Goytom Abraha Kahsay Laura MørchAndersen Lars Gårn Hansen Department of Food and Resource Economics, University of Copenhagen

2. Motivation • recent studies find that incentives can be counterproductive in settings like charitable giving and volunteering. • In this paper we investigate if similar crowding out effects could arise for purchases of everyday consumption products with ‘pro-social’ characteristics such as a ‘fair trade’ or ‘organic’ certification

3. Prior Lit. • Bénabou and Tirole (2006) suggest pro-social behavior like volunteering blood or work is because it sends the signal that the person is a pro-social type. • People who value reputation may react to the introduction of incentives by reducing their pro-social behavior. This could explain the crowding out seen in many empirical studies. • It has also become clear that consumers of everyday market products are willing to pay for pro-social characteristics such as fair trade, animal welfare and environmental friendliness.

4. Our contribution • We combine a Bénabou and Tirole (2006) reputation-signaling model and a Gorman characteristics model of consumer’s choice between products to formally explain generation of pro-social image • We investigate how different types of consumers react to changing prices when reputation is important and we may see perverse reactions to price changes.

5. Our contribution • We then use a unique Danish consumer panel that combines detailed purchase data with questionnaire data allowing us to single out consumers that are concerned about their pro-social image. • We find evidence of perverse price reactions within this group while other consumers exhibit ‘normal’ price reactions. • Our data also suggest that the proportion of image concerned consumers is substantial.

6. Basic model Utility: Choice:

7. Basic model Reputation:

8. Implication 3: Homogenous reputation concern

9. Simulation Results: Heterogenousreputation concern

10. Positive and negative news indices over time Data • 290 households from the GfK-denmark consumerscan panel • 2007-2008 (weekly observations) • Detailed Milk purchase information • Detailed attitude questionair

11. Demand Effekts of discounts on organicmilk to conventionalmilkpricelevelConsumers who never buyconventionalmilk

12. Positive and negative news indices over time Probit model 10 liters per week potentially purchased by each hh. • P(organic skim) • P(organic semi) • P(organic mini) • P(organic no buy) = a*(kontrols)+b*(price*reputation_type)+ c*(discount*reputation_type) Kontrols:store type, reputation_type,mundloc means

13. Estimatedeffects of organic discount to conventionalprice for consumerswho never buyconventional (prelimresults) Proportion of reputation concerned: 58%

14. LR tests of signal crowding model and Neo-classicalmodel (prelimresults) Proportion of reputation concerned: 58%

15. Over the entire period Over the discount periods Controlling for otherexplanations: time of purchase/rationing Over the discount periods • Over the entire period Over the non-discounted periods

16. Policy simulation • Simulation of a uniform subsidy (on the organic brands in the two close subsstitute markets): welfare decreases by 0.92%, • Simulation of a differentiated subsidy (subsidizing only the major market) decrease the welfare by 0.44%.

17. Conclussion • Signaling can cause perverse price reactions • We find evidence of perverse price reactions within organic milk consumers while other consumers exhibit ‘normal’ price reactions suggesting correlated pro-social and reputation parameters • Simulation results indicate that welfare costs of subsidy can be reduced by deviating from a uniform subsidy.