Do Food Labels Make a Difference? . . . Sometimes
The economics behind
food labeling provides insight into the dynamics
of voluntary and mandatory food labeling and the
influence labeling has on consumers’ food
choices.
Elise
Golan, Fred
Kuchler, and Barry
Krissoff
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Competition
drives food manufacturers to voluntarily
label their products’ desirable
attributes and to use third-party certifiers
to bolster credibility. |
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Mandatory
food labeling is usually more successful
at filling information gaps than at
addressing externalities such as environmental
or health spillovers associated with
food production and consumption. |
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Mandatory
labeling may initially have a larger
impact on manufacturers’ production
decisions than on consumers’ food
choices. |
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| This
article is drawn from . . . |
| Economics
of Food Labeling, by Elise Golan,
Fred Kuchler, Lorraine Mitchell, Cathy Greene,
and Amber Jessup, AER-793, USDA, Economic
Research Service, December 2000.
Country-of-Origin
Labeling: Theory and Observation,
by Barry Krissoff, Fred Kuchler, Kenneth Nelson,
Janet Perry, and Agapi Somwaru, WRS-04-02,
USDA, Economic Research Service, January 2004.
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| You
may also be interested in . . . |
| ERS
Briefing Room on Food Safety
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There is a lot to know about the
food we eat. The ingredients in a jar of spaghetti
sauce, a box of cereal, or a cup of coffee could
come from around the corner or around the world;
they could be processed by children or by high-tech
machines; they could be grown on huge corporate
farms or on small family-run farms; or they could
be mostly artificial or 100-percent natural.
While a description of a food
product could include information on a multitude
of attributes, not all of them are important to
consumers or regulators. Information on some attributes
could affect the health and welfare of consumers
by influencing their food choices. Information on
other attributes might have no effect at all.
Consumers, food companies, third-party
entities, and governments play a role in determining
which attributes are described on the label. The
interaction of these groups influences which information
is labeled voluntarily, which is mandated, and which
is not labeled at all. It shapes the way information
is presented and the accuracy and credibility of
that information. The economics behind food labeling
provides insight into the dynamics of voluntary
food labeling and the types of market failures best
addressed through mandatory labeling requirements.
Companies Will Voluntarily
Label If Their Benefits Outweigh Their Costs
Voluntary labeling is one of a
food company’s many advertising options. Assuming
that companies attempt to maximize profits, they
will add information about an attribute to the label
as long as each additional message eventually generates
more benefits than costs. The primary benefits of
labeling for a company come from either increasing
profits or maintaining profits in the face of new
competition. Either outcome is more likely if consumers
use the information to differentiate the labeled
product from similar products and then buy it.
The probability that consumers
will value and react to labeled information is improved
if the label successfully persuades consumers that
it conveys information about a meaningful distinction
between labeled and unlabeled products. If consumers
decide that the information’s significance
or accuracy is questionable, they will not use it
to modify their purchase decisions. Researchers
from the University of California and ERS found,
for example, that the geographic branding of Washington
State apples is losing its impact because it does
not convincingly differentiate the State’s
apples from those grown in other areas.
To bolster the meaningfulness of their
message, firms often rely on advertising and other
types of outreach. In 2005, the U.S. food industry
spent $32 billion on advertising and $66.5 billion
on packaging to differentiate their products from
the competition (see “Food
Product Introductions Continue To Set Records”).
Firms may also try to convince
consumers of the validity of their labeling claims
by using third-party labeling services. By offering
an “unbiased” assessment of a labeling
claim, these services help strengthen the credibility
of voluntary labeling (see box, “Third-Party
Labeling Services Can Improve Market Efficiency”).
A number of entities, including consumer groups,
producer associations, private companies, national
governments, and international organizations, provide
third-party services. The Good Housekeeping Institute,
for example, founded for the purpose of consumer
education and product evaluation, sets product standards
and provides consumer guarantees for a multitude
of goods, including foods. Two private companies,
Société Générale de
Surveillance (SGS) and AIB International (originally
the American Institute of Baking), verify and certify
food safety for a wide range of food products. USDA’s
Agricultural Marketing Service (AMS) has developed
official grade standards for meats, eggs, poultry,
dairy products, fresh fruits, vegetables, tree nuts,
peanuts, and other commodities. ISO, a worldwide
federation of national standards institutes, promotes
the development of international standards for a
variety of products and production processes.
The value of the labeling service
generally depends on the credibility and reputation
of the providing entity. In some cases, national
governments or associations of national governments
may be the most widely recognized and reputable
third-party providers of labeling services. But
this is not always true. For example, although U.S.
consumers tend to have confidence in USDA and the
Food and Drug Administration (FDA) to regulate food
safety, Europeans rank national bodies far below
international, environmental, consumer, and farm
organizations in terms of trustworthiness.
Private and government labeling
services have helped support an explosion of voluntary
food labeling. American grocery store shelves have
become veritable encyclopedias of labeling claims.
A single carton of eggs sold in a national grocery
store chain, for instance, is labeled with a “cage
free” claim, the grocery store “quality
and satisfaction money-back guarantee” logo,
the Orthodox Union symbol of kosher certification,
and a long list of nutrient claims, including “25%
of the daily value of vitamin E; 185 mcg of lutein
per egg; and 100 mg of omega-3 polyunsaturated fatty
acids per egg.”
A byproduct of the explosion of
labeled attributes is that consumers learn to “read
between the labels” and make deductions about
unlabeled products. For example, confronted with
one can of tuna labeled “dolphin friendly”
and one with no such claim, consumers would likely
assume that the unlabeled tuna was caught with dolphin-endangering
practices. In a competitive marketplace, the presence
of a label is a signal of quality, and the lack
of a label on competing brands implies the absence
of the quality attribute.
Consumers’ ability to make
inferences about quality further spurs the proliferation
of labels. Companies in a competitive marketplace
are motivated to make explicit claims for all positive
“sellable” product attributes since
they know that consumers may interpret the lack
of labeling as a lack of the attribute. It is almost
impossible, for example, to find a can of tuna in
the United States without a dolphin-friendly label.
Ultimately, the company’s
bottom line sets limits on product differentiation
and labeling. Not all attributes are worth the cost.
“Predator-friendly” labeling, a campaign
to promote wolf-friendly cattle ranching, has not
had the success of the dolphin-friendly label. Likewise,
“Made in America” or similar country-of-origin
labeling is not always a valuable marketing attribute.
Only if consumers believe that food produced in
the United States is tastier, safer, or has some
other distinctive attribute will the label be worthwhile
to manufacturers or retailers. A company’s
benefit-cost criterion for deciding which information
to include on the label helps ensure labeling efficiency.
Only information valuable enough to consumers to
justify the cost is included on the label.
Voluntary Labeling May
Leave Information Gaps
Economic theory predicts that
voluntary labeling is not always sufficient for
disclosing information on all attributes consumers
value or for guaranteeing information accuracy.
One limitation to voluntary labeling may arise when
an entire product category has an undesirable characteristic.
In these cases, manufacturers do not compete on
the attribute and therefore do not provide labeled
or otherwise advertised information to consumers.
For example, there was little information on the
sodium content of processed foods before manufacturers
were required to disclose it. The competitive process
did not work well to reveal high-sodium products;
few manufacturers competed to offer reduced-sodium
products because less of this “health negative”
attribute also tends to reduce taste.
Another limitation to voluntary
labeling arises because manufacturers may provide
only relative information. For example, a sausage
label may boast “30 percent less fat than
the leading brand” or a bacon label may brag
“half the sodium.” Although this type
of information is valuable for deciding among competing
brands of the same item, it is not complete. Lower
fat sausage may still be a high-fat food. In many
cases, consumers need information on absolute, not
just relative, values to make fully informed consumption
decisions.
Market forces may also be unable
to eliminate partial disclosure and innuendo. For
example, in early 2000, a manufacturer began marketing
a wheat-flake cereal with a label proclaiming no
“genetically engineered ingredients.”
A consumer advocacy group asked the FDA to take
enforcement action against the manufacturer (and
six others) on the grounds that the labels were
misleading because they implied that the absence
of genetically engineered ingredients distinguished
the product from competing brands, when actually,
no genetically engineered wheat is present in any
food. The manufacturer removed the label.
Mandatory Labeling Has
Targeted Information Gaps and Social Objectives
U.S. Government intervention in
labeling began in 1906 with the Federal Pure Food
and Drugs Act and the Federal Meat Inspection Act,
which authorized Federal regulation of the safety
and quality of food and prohibited sales of misbranded
or adulterated foods. Lawmakers’ primary objective
in passing the acts’ labeling regulations
was to enhance fair competition by cracking down
on deceptive marketing practices.
Enhancing fair competition and
market efficiency has remained a primary motivation
behind food labeling regulation for the past 100
years. Regulations ranging from the 1966 Fair Packaging
and Labeling Act (requiring all consumer products
in interstate commerce to contain accurate information
to facilitate value comparisons) to the Organic
Foods Production Act 1990 have sought to create
a level playing field for producers by providing
consumers with accurate information for comparing
products and making choices. These regulations seek
to increase informed consumption, not to alter consumption
behavior. USDA’s National Organic Program
(the result of the Organic Foods Production Act)
is designed to improve the comparability of organic
labeling claims, not persuade more consumers to
choose organic products.
Recently, government intervention
in labeling has begun to target environmental or
other spillovers associated with food production
and consumption. Individual food consumption decisions
can have social welfare consequences, including
effects on the environment, health and productivity,
labor conditions, and farm and industry structure.
For example, consumers who eat tuna caught with
encircling nets may inadvertently endanger dolphins.
Economists describe these kinds of situations, in
which the action of one economic agent affects the
well-being or production possibilities of another
in a way that is not reflected in market prices,
as externalities.
When private consumption decisions
result in externalities, social welfare may be maximized
by a labeling choice that differs from one generated
by private firms. In the tuna example, the potential
benefits of providing information on labels include
fewer dolphin deaths. For society as a whole, these
potential benefits may outweigh the increase in
profits that compose a private firm’s labeling
benefits. As a result, the social benefits of labeling
may outweigh the social costs even though the private
benefits do not outweigh private costs. The opposite
could also be true. For example, the increased consumption
of red wine resulting from labeling red wine with
the information that moderate consumption may lower
the risk of heart disease could result in higher
costs from more birth defects, car accidents, and
alcohol-related health costs. These social costs
may outweigh the benefits of reduced heart disease.
On the other hand, the firm’s net benefits
may be positive: the costs of redesigning labels
could be lower than the benefits of increased sales
triggered by the health claim.
In externality cases where private
firms do not supply relevant information, the government
may decide to intervene in labeling decisions to
try to maximize net social benefits. Government-mandated
labeling can be a useful tool for achieving social
objectives because of the potential power of information
to influence consumption decisions. However, economic
theory suggests that labels may be a poor means
of addressing problems of externalities and advancing
social objectives, such as protecting consumer health
or the environment. Even if some consumers alter
their behavior to account for externality costs,
others do not, which means that the objective will
probably not be met. For example, while some may
purchase only free-range chickens, their goal of
ending chicken cooping will not be achieved as long
as most consumers continue to buy chickens raised
in coops.
Economic theory identifies a number
of policy tools that may be more suited to redressing
externalities than information remedies. Bans, quotas,
production regulations or standards, and Pigouvian
taxes (which impose the externality cost of an activity
on its producer) may be more successful than mandatory
labels in adjusting consumption and production to
better match socially optimum levels.
Empirical studies have found mixed
results on the efficacy of labels in educating consumers
and changing consumption behavior. These studies
highlight the observation that consumers often make
hasty food choices in grocery stores and usually
do not scrutinize food labels. Researchers from
Purdue University and the Ecole Nationale Superieure
de Genie Industriel in France found that most participants
in a marketing experiment did not notice the “GMO”
(genetically modified organism) label on a food
product until the label had been projected in large
letters on a big screen.
Research also shows that a large
number of warnings or a list of detailed product
information may cause many consumers to disregard
the label completely. And, even if consumers do
consider each piece of information on a label, they
may find it difficult to rank the information according
to importance. For example, out of 10 warnings on
a label, consumers may have difficulty picking out
the most important. As a result, consumers may underreact
to important information or overreact to less important
information.
Labels May Influence Producers
More Than Consumers
The primary impact of mandatory
labeling regulations may stem from their effect
on product reformulation and innovation, not on
consumers’ food choices. Changes in labeling
regulations can open up areas of competition by
allowing producers to compete on a new set of attributes,
like health claims. To compete in these new areas,
manufacturers may introduce new or reformulated
products. Economists at the Federal Trade Commission
found that regulation allowing health claims on
cereal boxes resulted in significant product innovation
and a plethora of cereals claiming to help reduce
the risk of cancer. New labeling requirements can
also spur product introductions or reformulations.
Firms that are forced to disclose the negative characteristics
of their products may choose to reformulate rather
than risk losing sales from disclosure.
Manufacturers’ reactions to
labeling policy could be quite swift. In an effort
to be the first to label—and capture first-mover
profits—manufacturers may reformulate before
consumer demand kicks in. FDA researchers found
that leading up to mandatory trans fat labeling,
most consumers did not know whether trans fats were
good or bad. Nevertheless, in anticipation of mandatory
labeling, manufacturers quickly jumped on the “no
trans fat” bandwagon. From January 2005 through
the first 9 months of 2007, manufacturers introduced
5,459 products with labeling touting low or zero
trans fat content.
Manufacturers may label and reformulate
even though most consumers are not particularly
interested in the new attribute. Sometimes a small
niche group of consumers is enough to warrant the
expense of reformulation and product innovation,
particularly when the new ingredient or attribute
does not affect taste or price and therefore does
not alienate core groups of consumers. The more
attributes manufacturers can stack in their products—eco-friendly,
low-sugar, fair-trade, high-fiber—the more
niche consumers they may be able to attract.
As a result of product reformulation,
labeling regulation can affect consumer food choices
more than would have been accomplished simply via
consumers’ reactions to labels. Even consumers
who remain indifferent to or unaware of a new attribute
may consume more of it if their usual food choices
have been reformulated. For example, some consumers
of popular snack foods may not know that their favorite
nibbles are now made without trans fats. They are
reaping the benefits of a potentially more healthful
diet without changing their food choices. However,
if the price of their favorite snack rises because
of reformulation, consumers who do not want the
new attribute are made worse off.
The benefits and costs of labeling
regulation could be far reaching when manufacturers
respond by reformulating. A shift to “zero
trans fat” has triggered changes all along
the processed food chain, including investments
in new processing technologies and the development
of soy and canola crop varieties with different
oil characteristics. Other reformulations could
have ramifications for the environment, animal welfare,
and consumers’ health and budgets.
These cases stand in stark contrast
to those in which labels go unread and unnoticed.
They also underscore the potential of labeling policy
that works with industry incentives to affect the
content and quality of American diets.
| Third-Party
Labeling Services Can Improve Market Efficiency
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| Third-party
labeling services—services offered by
an entity other than the buyer or seller—can
increase a label’s value by increasing
its reliability and credibility. These services
improve market efficiency by reducing uncertainty
for producers and search and information costs
for consumers. By increasing the value of
information, third-party services can also
boost the amount of information that producers
provide to consumers through product labels.
The four primary third-party labeling services
are standard setting, verification, certification,
and enforcement. A single entity could provide
just one service or any combination of all
four services.
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Through standard
setting, third-party authentication
helps ensure consumers that a firm’s
quality standards are meaningful for differentiation
and are not simply empty marketing ploys.
For example, “green,” “sustainable,”
or “fair trade” could mean
almost anything. Successful third-party
standards establish a common terminology
for goods possessing the same quality
characteristics.
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Verification
services can take the form of either testing
(such as testing that pathogen contamination
or other safety problems are under control)
or process verification (such as inspecting
production facilities and bookkeeping
records to verify that firms have adhered
to safety and quality standards and followed
specified production practices) or segregation
and traceability monitoring to verify
the existence of process attributes, such
as organic, fair trade, dolphin-safe,
and sustainable. These services help producers
strengthen their labeling claims by providing
an objective measure of product attributes.
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Third-party certification
provides evidence that testing and/or
process verification has been completed
and that the information supplied by firms
or third-party verifiers is correct. Third-party
certification provides an objective evaluation
of the product’s quality attributes
and helps firms establish credible market
claims. Through accreditation, third-party
certification can also establish the credentials
of other third-party services, including
other third-party certifiers. For example,
USDA accredits third-party certifiers
for the National Organic Program.
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Third-party enforcement
provides further assurances that quality
claims are valid. Private third-party
enforcement includes watchdog services
and de-certification. Watchdog-type enforcement
relies on negative publicity to discourage
fraud. Firms with valuable reputations
will be most susceptible to this type
of enforcement. De-certification provides
a clear indication that a product has
failed to comply with quality standards.
De-certification by government entities
could carry the added penalty of prohibiting
marketing of the product. Legal requisites
concerning advertising and fraud provide
the ultimate enforcement, even for voluntary
claims.
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