Dietary Choice and the Economics of Information: "Hidden quality" in the history of American food

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This short lecture was delivered at the "Shopping for Health" workshop sponsored by the University of Washington in May 2010. The working paper referenced on slide 2 has since been published, and is available for download here: http://www.business.otago.ac.nz/econ/Personal/ts_files/invisible.pdf

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Dietary Choice and the Economics of Information: "Hidden quality" in the history of American food

  1. 1. Supply & Demand A Lemons Revolution Making LemonadeDietary Choice and the Economics of Information “Hidden quality” in the history of American food Trenton G. Smith Assistant Professor Washington State University School of Economic Sciences May 7, 2010 Trent Smith Demand for Healthy Foods: The Role of Information 1
  2. 2. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?Supply-side ExplanationsDemand-side Explanations Trent Smith Demand for Healthy Foods: The Role of Information 2
  3. 3. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?Supply-side Explanations scarcity of land (price, availability) for large supermarkets smaller/independent stores lack access to supply chainDemand-side Explanations Trent Smith Demand for Healthy Foods: The Role of Information 2
  4. 4. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?Supply-side Explanations scarcity of land (price, availability) for large supermarkets smaller/independent stores lack access to supply chainDemand-side Explanations time cost (one-stop shopping...car required?) income levels stress/income insecurity education levels/nutritional literacy/access to information Trent Smith Demand for Healthy Foods: The Role of Information 2
  5. 5. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?Supply-side Explanations scarcity of land (price, availability) for large supermarkets smaller/independent stores lack access to supply chainDemand-side Explanations time cost (one-stop shopping...car required?) income levels stress/income insecurity education levels/nutritional literacy/access to informationOverall: trends working against access. Trent Smith Demand for Healthy Foods: The Role of Information 2
  6. 6. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?Supply-side Explanations scarcity of land (price, availability) for large supermarkets smaller/independent stores lack access to supply chainDemand-side Explanations time cost (one-stop shopping...car required?) income levels stress/income insecurity education levels/nutritional literacy/access to informationOverall: trends working against access.(My interest: demand-side emphasis) Trent Smith Demand for Healthy Foods: The Role of Information 2
  7. 7. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?Supply-side Explanations scarcity of land (price, availability) for large supermarkets smaller/independent stores lack access to supply chainDemand-side Explanations time cost (one-stop shopping...car required?) income levels stress/income insecurity education levels/nutritional literacy/access to informationOverall: trends working against access.(My interest: demand-side emphasis)Today: Role of information in history of U.S. retail market. Trent Smith Demand for Healthy Foods: The Role of Information 2
  8. 8. Supply & Demand A Lemons Revolution Making Lemonade Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas? School of Economic Sciences Working Paper Series WP 2009-07 WAITING FOR THE INVISIBLE HAND: Market Power and Endogenous Information in the Modern Market for Food By Trenton G. Smith, Hayley H. Chouinard and Philip R. Wandschneider February 2009Today: Role of information in history of U.S. retail market. Trent Smith Demand for Healthy Foods: The Role of Information 2
  9. 9. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightRevolution at the Table: A National Market is Born Between 1880 and 1930, a series of innovations transformed the American diet (Levenstein 1988). Trent Smith Demand for Healthy Foods: The Role of Information 3
  10. 10. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightRevolution at the Table: A National Market is Born Between 1880 and 1930, a series of innovations transformed the American diet (Levenstein 1988). 1 The advent of railroads made it possible to efficiently transport goods over long distances. Trent Smith Demand for Healthy Foods: The Role of Information 3
  11. 11. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightRevolution at the Table: A National Market is Born Between 1880 and 1930, a series of innovations transformed the American diet (Levenstein 1988). 1 The advent of railroads made it possible to efficiently transport goods over long distances. 2 Newly developed technologies (notably: meatpacking, canning, pasteurization, milling, sugar refining, and hydrogenation) made it possible to mass-produce foods that could withstand extended storage and shipment. Trent Smith Demand for Healthy Foods: The Role of Information 3
  12. 12. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightRevolution at the Table: A National Market is Born Between 1880 and 1930, a series of innovations transformed the American diet (Levenstein 1988). 1 The advent of railroads made it possible to efficiently transport goods over long distances. 2 Newly developed technologies (notably: meatpacking, canning, pasteurization, milling, sugar refining, and hydrogenation) made it possible to mass-produce foods that could withstand extended storage and shipment. 3 Newly popular national magazines made it possible to widely advertise new products to middle class households. Trent Smith Demand for Healthy Foods: The Role of Information 3
  13. 13. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightRevolution at the Table: A National Market is Born Between 1880 and 1930, a series of innovations transformed the American diet (Levenstein 1988). 1 The advent of railroads made it possible to efficiently transport goods over long distances. 2 Newly developed technologies (notably: meatpacking, canning, pasteurization, milling, sugar refining, and hydrogenation) made it possible to mass-produce foods that could withstand extended storage and shipment. 3 Newly popular national magazines made it possible to widely advertise new products to middle class households. The result was a dramatic shift from local and regional markets to a national market... Trent Smith Demand for Healthy Foods: The Role of Information 3
  14. 14. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightRevolution at the Table: A National Market is Born Between 1880 and 1930, a series of innovations transformed the American diet (Levenstein 1988). 1 The advent of railroads made it possible to efficiently transport goods over long distances. 2 Newly developed technologies (notably: meatpacking, canning, pasteurization, milling, sugar refining, and hydrogenation) made it possible to mass-produce foods that could withstand extended storage and shipment. 3 Newly popular national magazines made it possible to widely advertise new products to middle class households. The result was a dramatic shift from local and regional markets to a national market... ...and a concomitant shift in the composition of the typical diet away from traditional, freshly prepared foods and toward a diet composed largely of highly processed, packaged foods and ingredients. Trent Smith Demand for Healthy Foods: The Role of Information 3
  15. 15. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightThe Jungle: Hidden Quality Revealed There were many advantages to the new industrial food system... Trent Smith Demand for Healthy Foods: The Role of Information 4
  16. 16. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightThe Jungle: Hidden Quality Revealed There were many advantages to the new industrial food system... ...but an important consequence soon became apparent: The consumer could no longer see how his foods were handled and processed. In economics we call this an asymmetric information or “hidden quality” problem. Trent Smith Demand for Healthy Foods: The Role of Information 4
  17. 17. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightThe Jungle: Hidden Quality Revealed There were many advantages to the new industrial food system... ...but an important consequence soon became apparent: The consumer could no longer see how his foods were handled and processed. In economics we call this an asymmetric information or “hidden quality” problem. A dramatic example of this phenomenon came to light in 1906, with publication of Upton Sinclair’s The Jungle. Trent Smith Demand for Healthy Foods: The Role of Information 4
  18. 18. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightThe Jungle: Hidden Quality Revealed There were many advantages to the new industrial food system... ...but an important consequence soon became apparent: The consumer could no longer see how his foods were handled and processed. In economics we call this an asymmetric information or “hidden quality” problem. A dramatic example of this phenomenon came to light in 1906, with publication of Upton Sinclair’s The Jungle. A bestseller, The Jungle told the sordid tale of the newly-arisen meatpacking industry in Chicago. Its vivid descriptions of conditions in the plants turned America’s stomach. Trent Smith Demand for Healthy Foods: The Role of Information 4
  19. 19. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightThe Jungle: Hidden Quality Revealed There were many advantages to the new industrial food system... ...but an important consequence soon became apparent: The consumer could no longer see how his foods were handled and processed. In economics we call this an asymmetric information or “hidden quality” problem. A dramatic example of this phenomenon came to light in 1906, with publication of Upton Sinclair’s The Jungle. A bestseller, The Jungle told the sordid tale of the newly-arisen meatpacking industry in Chicago. Its vivid descriptions of conditions in the plants turned America’s stomach. Congress responded with 1906 Meat Inspection Act and Pure Food and Drug Act. Trent Smith Demand for Healthy Foods: The Role of Information 4
  20. 20. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightA Lemons Market Problems with food safety in the new national food market were entirely predictable. Trent Smith Demand for Healthy Foods: The Role of Information 5
  21. 21. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightA Lemons Market Problems with food safety in the new national food market were entirely predictable. Economic theory predicts that when it is difficult for buyers to assess product quality (used cars, processed foods...), a “lemons equilibrium” can result, in which only the lowest-quality goods are sold (Akerlof 1970). Trent Smith Demand for Healthy Foods: The Role of Information 5
  22. 22. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightA Lemons Market Problems with food safety in the new national food market were entirely predictable. Economic theory predicts that when it is difficult for buyers to assess product quality (used cars, processed foods...), a “lemons equilibrium” can result, in which only the lowest-quality goods are sold (Akerlof 1970). While market-based responses (consumer defensive measures, price premiums for reputable sellers...) can partially resolve this problem, sometimes it is necessary to establish a system of credible standards or certifications (e.g., 1906 legislation). Trent Smith Demand for Healthy Foods: The Role of Information 5
  23. 23. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightA Lemons Market Problems with food safety in the new national food market were entirely predictable. Economic theory predicts that when it is difficult for buyers to assess product quality (used cars, processed foods...), a “lemons equilibrium” can result, in which only the lowest-quality goods are sold (Akerlof 1970). While market-based responses (consumer defensive measures, price premiums for reputable sellers...) can partially resolve this problem, sometimes it is necessary to establish a system of credible standards or certifications (e.g., 1906 legislation). Ironically, concerns over food safety in 1900s drove consumers toward new proprietary processed foods, which were generally thought to be (and aggressively promoted as) healthier and more hygienic than traditionally prepared foods. Trent Smith Demand for Healthy Foods: The Role of Information 5
  24. 24. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightA Lemons Market Problems with food safety in the new national food market were entirely predictable. Economic theory predicts that when it is difficult for buyers to assess product quality (used cars, processed foods...), a “lemons equilibrium” can result, in which only the lowest-quality goods are sold (Akerlof 1970). While market-based responses (consumer defensive measures, price premiums for reputable sellers...) can partially resolve this problem, sometimes it is necessary to establish a system of credible standards or certifications (e.g., 1906 legislation). Ironically, concerns over food safety in 1900s drove consumers toward new proprietary processed foods, which were generally thought to be (and aggressively promoted as) healthier and more hygienic than traditionally prepared foods. Decades would pass before nutrition scientists would identify impacts of processing on health outcomes. Trent Smith Demand for Healthy Foods: The Role of Information 5
  25. 25. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightProcessing & Nutrition: Infant Foods, 1869–1930 1869: Liebig’s Soluble Food for Babies introduced. Many others followed. Trent Smith Demand for Healthy Foods: The Role of Information 6
  26. 26. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightProcessing & Nutrition: Infant Foods, 1869–1930 1869: Liebig’s Soluble Food for Babies introduced. Many others followed. 1890: Promoted as superior to breast milk (via magazine ads, free samples, pamphlets), use of proprietary infant foods widespread. Trent Smith Demand for Healthy Foods: The Role of Information 6
  27. 27. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightProcessing & Nutrition: Infant Foods, 1869–1930 1869: Liebig’s Soluble Food for Babies introduced. Many others followed. 1890: Promoted as superior to breast milk (via magazine ads, free samples, pamphlets), use of proprietary infant foods widespread. 1911: Pediatrics editorializes about the “sinister coincidence” of infant mortality among babies fed exclusively on these foods. Notes ongoing epidemics of infantile scurvy and rickets. Few mothers get the message. Trent Smith Demand for Healthy Foods: The Role of Information 6
  28. 28. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightProcessing & Nutrition: Infant Foods, 1869–1930 1869: Liebig’s Soluble Food for Babies introduced. Many others followed. 1890: Promoted as superior to breast milk (via magazine ads, free samples, pamphlets), use of proprietary infant foods widespread. 1911: Pediatrics editorializes about the “sinister coincidence” of infant mortality among babies fed exclusively on these foods. Notes ongoing epidemics of infantile scurvy and rickets. Few mothers get the message. 1930s: Vitamins now quantifiable in food. Processing shown to degrade vitamins. Producers turn to fortification. Trent Smith Demand for Healthy Foods: The Role of Information 6
  29. 29. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightHidden Qualities Revealed Early history of proprietary infant foods is not an anomaly. Typical pattern follows: Trent Smith Demand for Healthy Foods: The Role of Information 7
  30. 30. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightHidden Qualities Revealed Early history of proprietary infant foods is not an anomaly. Typical pattern follows: 1 Novel food product/process widely adopted, thought to be healthier/safer than traditional food. Trent Smith Demand for Healthy Foods: The Role of Information 7
  31. 31. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightHidden Qualities Revealed Early history of proprietary infant foods is not an anomaly. Typical pattern follows: 1 Novel food product/process widely adopted, thought to be healthier/safer than traditional food. 2 Decades pass before scientific consensus identifies dangers. Trent Smith Demand for Healthy Foods: The Role of Information 7
  32. 32. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightHidden Qualities Revealed Early history of proprietary infant foods is not an anomaly. Typical pattern follows: 1 Novel food product/process widely adopted, thought to be healthier/safer than traditional food. 2 Decades pass before scientific consensus identifies dangers. 3 Years pass before legislation/technology solve the problem. Trent Smith Demand for Healthy Foods: The Role of Information 7
  33. 33. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightHidden Qualities Revealed Early history of proprietary infant foods is not an anomaly. Typical pattern follows: 1 Novel food product/process widely adopted, thought to be healthier/safer than traditional food. 2 Decades pass before scientific consensus identifies dangers. 3 Years pass before legislation/technology solve the problem. (see: canning, milling, pasteurization, trans-fats, phytochemicals, glycemic effects...) Trent Smith Demand for Healthy Foods: The Role of Information 7
  34. 34. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightHidden Qualities Revealed Early history of proprietary infant foods is not an anomaly. Typical pattern follows: 1 Novel food product/process widely adopted, thought to be healthier/safer than traditional food. 2 Decades pass before scientific consensus identifies dangers. 3 Years pass before legislation/technology solve the problem. (see: canning, milling, pasteurization, trans-fats, phytochemicals, glycemic effects...) The final step in this process also follows a pattern, as illustrated by the national campaign for new food standards in the 1930s. Trent Smith Demand for Healthy Foods: The Role of Information 7
  35. 35. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightFood Fight: Canners Debate, 1933–1938 1933: Concern about quality/safety of canned foods leads Dept. of Agriculture to propose quality grading system (A, B, C...) reflecting integrity of product. Trent Smith Demand for Healthy Foods: The Role of Information 8
  36. 36. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightFood Fight: Canners Debate, 1933–1938 1933: Concern about quality/safety of canned foods leads Dept. of Agriculture to propose quality grading system (A, B, C...) reflecting integrity of product. Coalition of small regional canners and consumer groups favor strong new tiered grading system, push for passage. Trent Smith Demand for Healthy Foods: The Role of Information 8
  37. 37. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightFood Fight: Canners Debate, 1933–1938 1933: Concern about quality/safety of canned foods leads Dept. of Agriculture to propose quality grading system (A, B, C...) reflecting integrity of product. Coalition of small regional canners and consumer groups favor strong new tiered grading system, push for passage. Coalition of large national-brand canners and national magazines advocate against, push for single minimum-quality standard. Trent Smith Demand for Healthy Foods: The Role of Information 8
  38. 38. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightFood Fight: Canners Debate, 1933–1938 1933: Concern about quality/safety of canned foods leads Dept. of Agriculture to propose quality grading system (A, B, C...) reflecting integrity of product. Coalition of small regional canners and consumer groups favor strong new tiered grading system, push for passage. Coalition of large national-brand canners and national magazines advocate against, push for single minimum-quality standard. 1938: Congress passes Food, Drug, and Cosmetic Act of 1938, without tiered grading system. Trent Smith Demand for Healthy Foods: The Role of Information 8
  39. 39. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightFood Fight: Canners Debate, 1933–1938 1933: Concern about quality/safety of canned foods leads Dept. of Agriculture to propose quality grading system (A, B, C...) reflecting integrity of product. Coalition of small regional canners and consumer groups favor strong new tiered grading system, push for passage. Coalition of large national-brand canners and national magazines advocate against, push for single minimum-quality standard. 1938: Congress passes Food, Drug, and Cosmetic Act of 1938, without tiered grading system. Again, positions reflect economic interests: Nationally advertised brands ‘mediocre quality’ but owned the market; credible quality grades would bring price competition, free consumer from reliance on brand reputation. Trent Smith Demand for Healthy Foods: The Role of Information 8
  40. 40. Supply & Demand The Jungle A Lemons Revolution Processing Processing Making Lemonade Food FightFood Fight: Canners Debate, 1933–1938 1933: Concern about quality/safety of canned foods leads Dept. of Agriculture to propose quality grading system (A, B, C...) reflecting integrity of product. Coalition of small regional canners and consumer groups favor strong new tiered grading system, push for passage. Coalition of large national-brand canners and national magazines advocate against, push for single minimum-quality standard. 1938: Congress passes Food, Drug, and Cosmetic Act of 1938, without tiered grading system. Again, positions reflect economic interests: Nationally advertised brands ‘mediocre quality’ but owned the market; credible quality grades would bring price competition, free consumer from reliance on brand reputation. History repeats: 1973 imitation rule, organic standards, meat inspection, labeling. ‘Lemons’ problem persists, advocates say ‘opt out.’ Trent Smith Demand for Healthy Foods: The Role of Information 8
  41. 41. Supply & Demand A Lemons Revolution Making Lemonade If life gives you Lemons...History (and economic theory) suggest huge unmetdemand for higher-quality, nutritious foods. Trent Smith Demand for Healthy Foods: The Role of Information 9
  42. 42. Supply & Demand A Lemons Revolution Making Lemonade If life gives you Lemons...History (and economic theory) suggest huge unmetdemand for higher-quality, nutritious foods.In the absence of a strong national policy response,larger market failure provides opportunity for changelocally. Urban ‘food deserts’ are a prime target. quality/reputation as a profit center role for local health departments coalition of consumer and small/local producer consumer outreach/education, fostering of new local food culture Trent Smith Demand for Healthy Foods: The Role of Information 9

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