UC Davis Managerial Economics

Kristin Kiesel and Co-authors Publish “Consumer and Strategic Firm Response to Nutrition Shelf Labels” in the American Journal of Agricultural Economics

Feb. 14, 2020

The majority of Americans do not meet dietary guidelines and continue to consume more than the recommended values for added sugars, saturated fats, and overall calories in their diets. While the display of nutrition facts is mandatory on virtually all packaged foods sold in the United States, manufacturers and retailers add their own claims to capture consumers' attention at point of sale. Although front of package claims and shelf labels are monitored by the Food and Drug Administration, they are voluntary and firms selectively highlight product attributes. These labels are just one of many dimensions of greater product differentiation in an increasingly concentrated retail market, yet the impact of strategic firm response on consumer choice and overall welfare is not well understood.

In this paper we explore revealed consumer preferences for experimental nutrition shelf labels. We apply distinct experimental labeling treatments to one product category (microwave popcorn) in select stores of a national grocery retailer. Relying on models of persuasion and information developed in the advertising literature, we hypothesize that our labels either shift demand for the highlighted healthier products uniformly or trigger more complex rotations of product demand. We then estimate demand for microwave popcorn using store‐level scanner data in a discrete choice framework and calculate willingness to pay estimates for the labeled products. Finally, we consider potential strategic firm responses resulting from an actual implementation of such labels under several supply scenarios.

Our nutrition label experiment suggests that consumers do not fully utilize all of the nutrition information currently reported on Nutrition Facts Panel. We find that consumers respond when we highlight healthier products by providing nutrition information in a more salient fashion on experimental shelf labels, but that they also react differently depending on which and how many claims we display. For instance, consumers increase sales of products highlighted by single low calorie claims, but the almost identical set of products would need to be discounted to be sold when labeled with a low fat claim. Once we allow firms to adjust their prices in response to these labels and simulate welfare changes, we find significant consumer welfare losses when adding single claim shelf labels consumers prefer. Posting a comprehensive list of claims on a shelf label instead results in an increase in consumer surplus and the largest overall welfare change in our simulations. Neither manufacturers nor retailers would voluntarily label their products in this way in concentrated retail markets, however, as this labeling option does not maximize profits. Our most important result reported is that voluntary nutrition front of package or shelf labels may not be a panacea when trying to inform consumers about healthier food options.

For nutrition labeling to be successful, consumers need to process the information provided and choose healthier product alternatives as a result. Heterogeneous consumer preferences, limited attention spans, and potentially biased perceptions will likely trigger strategic firm responses in a market characterized by ongoing consolidation and increased market power of large manufacturing and retailing firms. Although limited in scope, our research provides important insights for regulators and motivates further research that focuses on the interplay between demand and supply in today's complex retail environment.

Read the full article here.

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