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

Supply & DemandA Lemons Revolution

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Dietary Choice and the Economics of Information“Hidden quality” in the history of American food

Trenton G. SmithAssistant Professor

Washington State UniversitySchool of Economic Sciences

May 7, 2010

Trent Smith Demand for Healthy Foods: The Role of Information 1

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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 chain

Demand-side Explanations

time cost (one-stop shopping...car required?)

income levels

stress/income insecurity

education levels/nutritional literacy/access to information

Overall: trends working against access.

(My interest: demand-side emphasis)

Today: Role of information in history of U.S. retail market.

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income levels

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income levels

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income levels

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income levels

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income levels

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income levels

Working Paper SeriesWP 2009-07

School of Economic Sciences

WAITING FOR THE INVISIBLE

Market Power and Endogenous Information in the

Modern Market for Food

Trenton G. Smith, Hayley H. Chouinard and Philip R. Wandschneider

February 2009

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The JungleProcessing ProcessingFood Fight

Revolution at the Table: A National Market is Born

Between 1880 and 1930, a series of innovations transformedthe American diet (Levenstein 1988).

1 The advent of railroads made it possible to efficiently transportgoods 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 withstandextended storage and shipment.

3 Newly popular national magazines made it possible to widelyadvertise new products to middle class households.

The result was a dramatic shift from local and regionalmarkets to a national market...

...and a concomitant shift in the composition of the typicaldiet away from traditional, freshly prepared foods and towarda diet composed largely of highly processed, packaged foodsand ingredients.

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The Jungle: Hidden Quality Revealed

There were many advantages to the new industrial foodsystem...

...but an important consequence soon became apparent:The consumer could no longer see how his foods werehandled and processed. In economics we call this anasymmetric information or “hidden quality” problem.

A dramatic example of this phenomenon came to light in1906, with publication of Upton Sinclair’s The Jungle.

A bestseller, The Jungle told the sordid tale of thenewly-arisen meatpacking industry in Chicago.Its vivid descriptions of conditions in the plantsturned America’s stomach.

Congress responded with 1906 Meat Inspection Act andPure Food and Drug Act.

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A Lemons Market

Problems with food safety in the new national food marketwere entirely predictable.

Economic theory predicts that when it is difficult for buyers toassess product quality (used cars, processed foods...), a“lemons equilibrium” can result, in which only thelowest-quality goods are sold (Akerlof 1970).

While market-based responses (consumer defensive measures,price premiums for reputable sellers...) can partially resolvethis problem, sometimes it is necessary to establish a systemof credible standards or certifications (e.g., 1906 legislation).Ironically, concerns over food safety in 1900s drove consumerstoward new proprietary processed foods, which were generallythought to be (and aggressively promoted as) healthier andmore hygienic than traditionally prepared foods.Decades would pass before nutrition scientists would identifyimpacts of processing on health outcomes.

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A Lemons Market

Problems with food safety in the new national food marketwere entirely predictable.Economic theory predicts that when it is difficult for buyers toassess product quality (used cars, processed foods...), a“lemons equilibrium” can result, in which only thelowest-quality goods are sold (Akerlof 1970).

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A Lemons Market

While market-based responses (consumer defensive measures,price premiums for reputable sellers...) can partially resolvethis problem, sometimes it is necessary to establish a systemof credible standards or certifications (e.g., 1906 legislation).

Ironically, concerns over food safety in 1900s drove consumerstoward new proprietary processed foods, which were generallythought to be (and aggressively promoted as) healthier andmore hygienic than traditionally prepared foods.Decades would pass before nutrition scientists would identifyimpacts of processing on health outcomes.

Making Lemonade

A Lemons Market

While market-based responses (consumer defensive measures,price premiums for reputable sellers...) can partially resolvethis problem, sometimes it is necessary to establish a systemof credible standards or certifications (e.g., 1906 legislation).Ironically, concerns over food safety in 1900s drove consumerstoward new proprietary processed foods, which were generallythought to be (and aggressively promoted as) healthier andmore hygienic than traditionally prepared foods.

Decades would pass before nutrition scientists would identifyimpacts of processing on health outcomes.

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A Lemons Market

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Processing & Nutrition: Infant Foods, 1869–1930

1869: Liebig’s Soluble Food for Babiesintroduced. 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 amongbabies fed exclusively on these foods. Notesongoing epidemics of infantile scurvy andrickets. Few mothers get the message.

1930s: Vitamins now quantifiable in food.Processing shown to degrade vitamins.Producers turn to fortification.

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Hidden Qualities Revealed

Early history of proprietary infant foods is not an anomaly.Typical pattern follows:

1 Novel food product/process widely adopted, thought to behealthier/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, asillustrated by the national campaign for new food standards inthe 1930s.

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2 Decades pass before scientific consensus identifies dangers.

3 Years pass before legislation/technology solve the problem.

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Food Fight: Canners Debate, 1933–1938

1933: Concern about quality/safety of canned foods leadsDept. of Agriculture to propose quality grading system(A, B, C...) reflecting integrity of product.

Coalition of small regional canners and consumergroups favor strong new tiered grading system, pushfor passage.Coalition of large national-brand canners and nationalmagazines advocate against, push for singleminimum-quality standard.

1938: Congress passes Food, Drug, and Cosmetic Act of1938, without tiered grading system.

Again, positions reflect economic interests: Nationally advertised brands‘mediocre quality’ but owned the market; credible quality grades wouldbring 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.’

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Coalition of small regional canners and consumergroups favor strong new tiered grading system, pushfor passage.

Coalition of large national-brand canners and nationalmagazines advocate against, push for singleminimum-quality standard.

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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 newlocal food culture

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 newlocal food culture

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

Health & Medicine

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