Lecture 12: Food Consumption and Labeling Policies

Kristin Kiesel UC Berkeley Lecture 12: Food Consumption and Labeling Policies

Motivation and Outline • Information provision as alternative policy tool to address externalities • Organic labeling • Nutritional labeling and the food guide pyramid • (non-biotech or non-GMO labeling) • Policy context as determinant of success • Food consumption • Interdependencies with marketing efforts and media coverage

Objective • Does availability of information insure that it will be incorporated into consumer behavior? • If not, which aspects of informational changes under labeling regulations are most effective in altering consumer behavior? A better understanding of the interplay between regulation, media coverage, and product marketing helps determine which regulatory tools best serve consumers interest and policy objectives at the same time

Food Consumption • For any policy evaluation, its history and context need to be well understood Traditional analysis of food demand Two influential models in analysis of additional aspects Additional determinants of individual food consumption General trends in food consumption

Traditional Analysis of Food Demand • Food demand depends on: • quality (nutritional value, taste, food safety) • prices and income • Increase in prices lead to reduction in consumption (“law of demand”) • Impacts of income on consumption • Luxury goods: increase in income results in more than proportional increase in consumption (filet mignon) • Normal good: increase in income results in less than proportional increase in consumption (cheese) • Inferiorgood: increase in income results in reduction in consumption (canned peas) • Illustration: 5% increase in income will increase consumption of filet mignon by 8%, increase in consumption of cheese by 4%, and reduce canned peas consumption by 7%

Traditional Analysis of Food Demand (cont.) • The demand for a specific food product depends on the price of other food products Complements: (peanut butter and jelly, bread and butter) increase in price of one will reduce the demand for the other (higher peanut butter price will reduce demand for jam) Substitutes: (butter and margarine, corn syrup and sugar) increase in price of one will increase the demand for the other (higher butter prices will increase the demand for margarine).

Traditional Analysis of Food Demand (cont.) • Seasonality and availability constraints • Turkey demand surges at Thanksgiving • Prices and quality of fruits and vegetables: • Additionally, most people shop at a particular supermarket, limiting their range to the assortment of that store Prices of fruits and vegetables are lowest in the midst of season when the quality is best price Middle of season Time

Two Influential Theoretical Models • Household production function (Becker 1965, Lancaster 1966): • Logic of production functions applied to consumer side: products are purchased in the market as inputs, and utility is derived from attributes after some transformation (e.g. labor, time) • Important concept of opportunity costs of time • Hedonic price functions (Rosen 1974) • Allows consideration of differentiated goods through a value (price) function that depends on specific amount of product characteristics

Household Production Models: A Modern Approach to Food Demand • Families purchase food products, and use equipment and time to produce meals (eggs versus omelet) • The demand for food depends on household composition and labor market considerations • Increased participation of women in labor force lead to increased demand for: Precut meats and salads Ready to eat meals Food outside of home (restaurants)

Hedonic Models: What’s in the price of food? • Hedonic price function: a product price is the sum of monetary valuation of each of its attributes • Price of food bundles payments for • Health (nutritional content) • Quality and taste • Convenience • Example: a $15 entry at a restaurant reflects: $5 nutritional components (calories, protein, vitamins, etc.), $4 quality and taste (specific preparation, seasoning, etc. ), $3 convenience, and $3 atmosphere • Two main trends: increased willingness to pay for convenience and taste (quality)

The Power of the Consumer • Only about 17% of new food products introduced in retail market succeed • Costs of failure are high as introduction of a new product nationally is $5-$10 million or more (Asp 1999) • Heterogeneity in preferences as important factor of food consumption • Implications for marketing, labeling, certification, and technology adoption • Factors affecting consumer demand beyond classical determinants not well understood and important area of research • Food consumption as possible political statement and new level of consumer-producer discourse (Puis 2000)

Lifestyle, Family Dynamics, and Cooking Skills • Food habits (cultural standardized set of behavior) and lifestyle as determinants of food demand • Family dynamics: • Women tend to have more control over food choices • The cook and the grocery shopper determine food purchases: Less convenience food is purchased when the shopper is not the cook (when wife cooks and the husband shops, he is less likely to buy precut chicken than when she shops) • Eating habits of children in household influence food choices (e.g. picky eater) • More skilled and appreciative cooks will buy less pre-processed food like precut vegetables (e.g. “slow food” movement)

Beliefs, Attitudes, and Perceptions • Religious and ethical beliefs, social and environmental considerations can further establish norms and constraints in food consumption: • Friday penance by Catholics (required meat abstinence); after announcement by Pope Paul VI (1966) that it is not binding, Friday fish consumption declined drastically • Kosher food for Jewish, and halal meats for Muslims • Vegetarian, vegan eating habits • non-biotech and organic preferences • Economic relevance: • Better understanding of consumer behavior • Policy implications

Established and Emerging Food Trends • Convenient foods • Fresh foods • Ethnic foods • Fusion foods • Prepared home meal replacements • Food mixtures • ‘Natural’ and ‘organic’ food • Health promoting foods (e.g. probiotics) • Physical performance foods

Regulatory Settings • Two types of informational policies: 1. Reactive policies: In response to food trends • Regulation to ensure consistent and truthful information provision to consumer • Development of standards, rules and certification (e.g. National Organic Program) Beliefs and perceptions can be invoked and strengthened by regulation 2. Proactive policies: Aimed at influencing food trends • Regulation to provide information aimed at directly affecting consumption patterns (e.g. Nutritional Labeling and Food Guide Pyramid) Attitudes and beliefs affect regulatory goals

The National Organic Program (NOP) • The U.S. organic market is projected to reach a value of $30.7 billion by 2007, with a five-year compound annual growth rate of 21.4 percent between 2002 and 2007, (Organic Trade Association) • One of the fastest-growing categories in food business. • Nearly two thirds of U.S. Consumers bought organic foods and beverages in 2005 (Consumer Reports 2006, CR). • Organic products sell at a significant price premium compared to their conventional counterparts at 50% on average which prices often doubling for milk and meats (CR 2006). • Organic Foods Production Act (OFPA) of 1990 required the USDA to develop a national standard to assure consumers that agricultural products marketed as organic meet consistent, uniform standards • National organic standard and labeling regulations for organically produced agricultural products became effective in October 2002

What is Organic Food? • Definition (from National Organic Program website, USDA): “Organic food is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water to enhance environmental quality for future generations. Organic meat, poultry, eggs, and dairy products come from animals that are given no antibiotics or growth hormones. Organic food is produced without using most conventional pesticides; fertilizers made with synthetic ingredients or sewage sludge; bioengineering; or ionizing radiation. Before a product can be labeled "organic," a Government-approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet USDA organic standards. Companies that handle or process organic food before it gets to your local supermarket or restaurant must be certified too.” Addresses positive environmental externalities of consuming organic food

What is Organic Food? (cont.) • USDA makes no claims that organically produced food is safer or more nutritious than conventionally produced food • Little or no scientific evidence on enhanced nutritional value or health benefits (e.g. Williams 2000) • In many studies top motives to buy organic are taste, food safety and health concerns Example: organic dairy (McEachern and McClean 2002) purchase motivations • Improved taste (30%) • Food safety (24%) • Health benefits (17%) • Environmental concern (16%) • Ethical concerns (10%) • These perceptions might be reinforced by USDA-label: • Attracts attention to attribute • Might suggest potential benefits or risks that make it worth pointing out Acts as an anchor and/or adds intrinsic value (Kahneman and Twersky 2000, Ariely , Loewenstein and Prelec 2003)

Cost-Benefit Analysis of the NOP • How do we go about evaluating the NOP? 1. How do we measure the costs? 2. How do we measure the benefits? • How do we account for heterogeneous preferences? • What if consumers choose organic products for the “wrong” reason? • How do we account for different informational aspects such as media coverage, marketing efforts, and actual labeling change? Do we see growth because of changes in regulations or were changes in regulations a result of growth ?

My research: Milk is Milk? 1.How does the implementation of the NOP and changes in information provision affect consumer preferences for organically produced milk? 2. Do these effects vary across consumer segments differentiated by both heterogeneous preferences and heterogeneity in prior knowledge and information costs? 3. How much did consumer benefit from these regulatory changes and how are these benefits distributed across consumer segments? 4. How do changes in purchase behavior relate to different aspects of the information changes, such as prior media coverage of regulatory changes and actual appearance of the USDA organic seal on milk containers? Preliminary results indicate a increased probability of organic milk purchase after the appearance of the USDA seal. The hedonic price function approach as well as simulations within discrete choice models suggest that consumers value the changes in labeling regulations. A positive relation between organic milk sales relative to total milk sales and media coverage prior to the appearance of the USDA organic seal is detected.

Nutritional Labeling and the Food Guide Pyramid What is the externality addressed with these regulations? • Nutrition, Labeling, and Education Act of 1990 gave FDA authority to require nutrition labeling of most foods • In April 1992 USDA’s Eating right pyramid released after a year of controversy and $855.000 additional spending • In February 2006 USDA unveils revised food pyramid

The Food Pyramid of to a Bad Start • In April 199, printing of the eating right pyramid was blocked due to opposition from meat and dairy industry: final version preferred version by meat and dairy industry (non-hierarchical) • Media coverage of the political background paints a picture of politics versus sciences

Related Research Findings • Purchase behavior changed, but purchase of “healthy” products increased only in some categories (e.g. Teisl, Bockstael, and Levy 2001) • Nutritional labeling has reduced and narrowed focus on nutrition in advertisement (e.g. Ippolito and Pappalardo 2002)

Back to Food Consumption…

Conclusions • Some critics say that organic labels takes attention away from health problems related to obesity and other nutritional issues • But, evaluation of organic labeling might provide a better understanding of successful aspects of informational regulation and ultimately allow to design better health and environmental related informational policies

Lecture 12: Food Consumption and Labeling Policies