Product and process certification in imperfectly competitive markets: An application to the United States pork markets

Tomas Karl Henrik Nilsson, Purdue University

Abstract

Concerns in the United States meat industry about food credence attributes, such as environmental degradation, animal welfare and antibiotics usage in live animal production are forcing food suppliers to change marketing strategies. These changes have brought three issues into the forefront of economic inquiry. The first issue centers on how to describe conceptually the consumer utility function if credence attributes are substitutable or complementary to each other. This issue is further complicated if consumers have heterogeneous preferences. The major finding is that the estimated utility parameters that describe the substitution and complementarity pattern are large, statistically significant and economically important but vary significantly across different segments of consumers. Therefore, consumer heterogeneity and attribute substitutability are two factors that require simultaneous consideration. The second issue focuses on how to characterize the demand for certified products when consumers have heterogeneous preferences. The study presents the estimates from a latent class model with three classes. The results indicate that there is a significant willingness to pay for certification. However, the willingness to pay is significantly different between the latent classes. In particular, two of the latent classes have significantly different willingness to pay for the certified products. The last but not least important issue concerns disentangling the economic impact from a voluntary credence-certification program on consumers and producers. The problem becomes somewhat more complex if consumers have heterogeneous preferences, markets are imperfectly competitive and whether firms are single- or multiproduct providers. The conventional and certified products continue to co-exist after the introduction of the certification program because there is a distribution of consumers that is relatively less concerned about credence qualities than the relative prices. Moreover, total welfare increases more when market power firms are single-product suppliers than when they are multiproduct suppliers. The reason is that because the multiproduct firm controls both the certified and conventional markets, it can restrict any demand expansion in the certified market by restricting the supply.

Degree

Ph.D.

Advisors

Fulton, Purdue University.

Subject Area

Agricultural economics

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