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Market and welfare effects of quality misperception in food labels

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  • Francisco Scott
  • Juan P. Sesmero

Abstract

Information‐based policies, most prominently labels, reveal credence attributes of food products and, presumably, help consumers make better choices by reducing their misperception of product quality. However, much remains unexamined regarding how firms' strategic reactions to consumers' misperception of quality influence the benefits of information‐based policies. We consider an oligopoly model where heterogeneous consumers can over‐ or underestimate the quality of products in the market, and firms choose quality and prices conditional on consumers' perception of quality. We find that, under empirically prevalent conditions, misperception can increase efficiency in relation to the perfect information case; it does so if (1) it strengthens firms' incentives to provide higher quality, countervailing the chronic underprovision of quality that prevails under perfect information, or (2) it galvanizes competition, reversing another deleterious effect of product differentiation, namely high quality‐adjusted markups that restrain commerce. Our results imply that information‐based policies aimed at curbing misperception, such as requiring or allowing (under voluntary certification) additional information, nudging, and changes in label format, can have deleterious effects on efficiency and, perhaps more importantly, hurt the very consumers they mean to protect.

Suggested Citation

  • Francisco Scott & Juan P. Sesmero, 2022. "Market and welfare effects of quality misperception in food labels," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1747-1769, October.
    • Handle: RePEc:wly:ajagec:v:104:y:2022:i:5:p:1747-1769
    DOI: 10.1111/ajae.12287
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    1. Otrachshenko, Vladimir & Hartwell, Christopher A. & Popova, Olga, 2023. "Energy efficiency, market competition, and quality certification: Lessons from Central Asia," Energy Policy, Elsevier, vol. 177(C).
    2. Jin, Yu & Zhou, Jiehong & Ye, Juntao, 2023. "Value of certification in collective reputation crises: Evidence from Chinese dairy firms," Food Policy, Elsevier, vol. 121(C).
    3. Jason Winfree, 2024. "Food Origin Labeling and “Promoting Competition”," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(2), pages 267-287, March.
    4. Daniel Rehsmann & Béatrice Roussillon & Paul Schweinzer, 2023. "Contesting Fake News," CESifo Working Paper Series 10632, CESifo.
    5. Francisco Scott, 2023. "An Experimental Analysis of Quality Misperception in Food Labels," Research Working Paper RWP 23-11, Federal Reserve Bank of Kansas City.

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