Three essays on food quality and transaction costs

Chengyan Yue

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Product quality and product differentiation have become increasingly important to producers and policymakers for explaining consumer choice over food products. Consumers are often willing to pay large price premiums for products with preferred attributes. Heterogeneity in quality increases the diversity of goods for consumers and can improve welfare. However, variation in quality also leads to higher transaction costs for consumers, producers and policymakers because quality attributes are hard to identify precisely and vary when the state of the world changes. The first essay addresses the issue of food-quality attributes driven by protectionist policy that inhibits exchange between two countries. Technical barriers to trade based on phyto-sanitary standards and their impact on food trade are investigated by accounting for quality heterogeneity based on the origin of the good (imported versus domestic) and for consumers' home-good preference. The second essay is concerned with the complex interaction between quality promotion, through brand advertising and geographical indication, and quality improving effort in the context of asymmetric information. The results show that if a producer makes the effort to improve quality level, the producer will prefer to rely on brand advertising for promoting its products and setting up its own reputation. Despite allowing the cost of promotion to be shared, a geographical indication does not sufficiently reward the effort to improve quality. The third essay addresses the effect of interaction between organic attributes, an intrinsic attribute of food and appearance, an extrinsic attribute of food. Evidence from an experimental auction shows that a majority of consumers are willing to pay more for organic than for conventional apples. However, at the first sight of any deterioration in the appearance of the organic apples, this segment is significantly reduced. Furthermore, cosmetic damage has a larger impact on the average willingness to pay for organic apples than for conventional apples.

Date: 2006-01-01
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