The Economics of Labeling Credence Goods: Theory and Measurement

Francisco Albert Scott, Purdue University

Abstract

This dissertation expands on the economics of labeling products with credence quality attributes. Specifically, it aims at incorporating recent discussions in the food markets regarding 1) consumers’ difficulty of perceiving the exact quality that labels try to communicate and 2) imperfect competition on quality and price between firms providing these labeled products. These items are important because consumers and firms have to navigate a market environment in which there exist many quality labels competing for consumers’ preferences (e.g., nonGMO, USDA organic, Bioengineered label, local) with many of these labels offering different grades of quality (e.g., 100% organic, organic, made with organic ingredients). While more quality label may match consumers’ heterogeneous preferences, they may cause confusion and misperception among buyers, ultimately impacting efficiency and distribution of surplus in the market. More quality labels also may impact firms’ decisions as firms can select themselves into different poles of the quality spectrum and avoid price competition by doing so. Finally, governmental policies that aim at educating consumers or provide them with more options (e.g., informational-based policies, graded USDA organic certification program) can have unintended consequences under an environment in which there exist market failures related to information or competition. My goal is to evaluate this complex environment in three interconnected studies. The first study is an applied theory paper in which I show how curbing consumers’ misperception about quality in a market of labeled credence attributes may decrease welfare if firms imperfectly compete in quality and prices. I show that this is true if consumers’ misperception offers incentives for firms to either expand the size of the market or increase the average quality of products offered. The second essay empirically tests these insights in controlled laboratory experiments in which subjects act as sellers that compete along quality and price dimensions. I show that the insights of the theory paper hold particularly when consumers overvalue a high-quality product that holds a large market share. Finally, in the last study of this dissertation, I show that the rank-order of the USDA organic certification program may not hold in all markets, as consumers may not have a high willingness to pay for 100% organic products. In the study, I show that consumers in the market of organic ground coffee market could be better off if USDA ditched the quality grade 100% organic of its program. Doing so would also benefit the most profitable firms in the market and increase welfare. This dissertation shows that label programs and food policies that tackle quality in credence attributes must be designed with two main market characteristics in sight. The first is how well consumers understand the information in labels. The second is what is the degree of competition in the market and how firms can use the certification program to extract further rents from consumers.

Degree

Ph.D.

Advisors

Sesmero, Purdue University.

Subject Area

Economics|Agronomy|Food Science|Statistics

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