Regional & Production Appellations for Rural Development Can they help?

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Regional Production Appellations for Rural
DevelopmentCan they help?

• John M. Crespi
• Kansas State University

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• The issue is whether producers -- either in a
  region or using a distinctive production process
  -- can collectively brand themselves to
  increase profits.
• Goal for this session is to discuss what the
  economic theory says about this type of
  collective product differentiation.

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Handouts (shameless promotion)

• Two papers written by myself and Stephan Marette.
• Can Quality Certification Lead to Stable Cartels?
• Eco-Labelling Economics Is Public Involvement
  Necessary?
• aside the answers are, respectively, Yes and
  Occasionally.

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Appellations

• I am being loose with the term.
• Any mark or label that is used by a producer
  association to differentiate a product based upon
  region and/or regional production process.
• A mark of product differentiation that differs
  from a brand because it is not owned by any one
  firm.

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Protected Geographic Indicators/Protected
Designation of Origins

• Legally different from Appellations (which is
  used mostly for wines) but same idea.
• Very popular in Europe
• Very contentious for exporters seeking European
  markets.
• This month Colombian coffee growers became the
  first non-EU group to seek a protected food name
  in Europe.

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Labels Appellations
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Examples.
Parma
Appellation Medoc
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Do these labels improve profits?

• What does economic theory say?

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Background Experience vs. Credence Claims

• Tastes are experience claims. Easily verified
  after purchasing.
• Sweet Juicy, Tender, Spicy, An
  Approachable Little Pinot with a soupcon of
  Camembert and Mushroom, etc.
• Credence claims are harder for a consumer to
  verify either before or after purchasing
• Organically grown, Alexander Valley,
  Contains no GMOs, I-80 Beef, Highly Regarded
  Economist, etc.

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Moral Hazard Issue with Credence Labels

• If consumers cannot check the claim, anyone can
  make it high-quality good will not emerge on the
  market.
• Relatedly with appellations, if consumers are
  uncertain what the claim means, any firm can try
  to make a similar claim Kraft Parmesan vs. true
  Parmesan cheese.
• Premia will dissipate as consumer uncertainty
  grows.

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Appellation Characteristics are often Credence
Goods

• Although there are experience attributes,
• many claims (Parmas fresh mountain air) have to
  be taken on faith,
• as such consumers will want some verification
  that the product is what it claims to be.
• The literature on credence goods shows that these
  attributes are often toughbut not impossibleto
  market.

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• The reason credence claims are tough to market
  are
• consumers have to believe the appellation conveys
  some premia-necessitating quality,
• and consumers have to believe the appellation
  (hence, the claim) is credible.

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Issues emanating from cartels exist here, too.

• Obviously were talking about some type of cartel
  for producer quality or regional restrictions.
  Issues...
• Antitrust issue, though Co-ops, Mktg. Orders,
  PDIs etc. provide legal rationale.
• Cartel stability can price be maintained and if
  not, is deviation a worry?
• Relatedly, if the label is profitable what
  prevents new producers from entering and eroding
  premia.
• If the cartel pays the cost, can free-riding by
  similar-sounding appellations or claims erode
  premia?
• Worry is over keeping the cartel distinct, stable
  and profitable.

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Quality Signaling and Cartel Stability

• Much has been written on why cartels break down.
• Little has been written about cartels formed for
  purpose of signaling some quality
  differentiation.
• Theory shows that cartels that differentiate
  themselves via quality signals can circumvent
  cartel breakdowns and can also...
• Improve overall welfare.
• Thus cartels for appellations if consumers
  truly desire the good may be in both producers
  and societies best interest.
• Marette Crespi

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Why dont more products with appellations exist
in the U.S.?

• Is this a feature of credence goods?

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Claim If it were profitable it would already
exist.

• The fact that no major supermarket company has
  joined the voluntary program... tells you all you
  need to know about whether this program is a good
  idea or not.
• Tim Hammonds, President Food Marketing Institute,
  on country-of-origin labeling.

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Claim If it were profitable it would already
exist.

• In the case of credence characteristics, in my
  opinion, this claim is mostly a myth for 3
  reasons.

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Claim If it were profitable it would already
exist.

• Reason 1 this is a myth. The logistics of
  modern commodity agriculture with its commingling
  and bulk handling are great for cost efficiencies
  but lousy for relating consumer signals back to
  producers.
• Hayes Lence
• Doubly true with respect to consumer demand for
  credence attributes.
• The innovation of the organics movement had to
  begin outside the typical ag. marketing channels.
• Now, that organic is established and profitable
  the major agbus players are getting involved and
  will take it to the next level ConAgra, General
  Mills, Gallo Wine, Heinz, Phillip Morris-Kraft,
  MM Mars, Coca-Cola.
• see also Barkley

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Claim If it were profitable it would already
exist.

• Reason 2 this is a Myth. Market power affects
  firm decisions on both the quality content and
  the signaling of that quality.
• Competitive firms address quality desires of
  average consumers.
• Monopolies address quality desires of marginal
  consumers.
• Marginal consumers desire for quality could be
  higher or lower than average consumer, but are
  likely not the same.
• Market power will have an effect on product
  quality.
• Market power will have an effect on how firms
  signal that quality and, thus, how producer
  associations signal that quality.
• Nicholson Marette Crespi Mooman, Du Mela

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Claim If it were profitable it would already
exist.

• Reason 3 this is a Myth. Market failure occurs
  when consumers are uncertain about the attribute.
• In the case of uncertainty about an attribute,
  consumers WTP is hedged downward, and will send
  an inaccurate signal of consumer desires.
• Result, firms willing to provide the credence
  attribute will not be able to adequately signal
  its presence and attribute may not emerge in the
  market.
• Akerlof Salop Stiglitz.

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Signaling credence attributes. What does the
literature say?

• The literature shows that the most important
  feature of profitable credence labeling is an
  accurate, understandable, and verifiable signal.

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Accurate Understandable Signals
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Literature on Appellations Effectiveness?

• Not much, but there is a large literature on
  effectiveness and consumer response to other
  types of voluntary and mandatory labels.

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Issue of effective labeling comes down to
Credence Issues.

• With credence claims, surveys and literature show
  that outside verification is a must.
• For credence attributes, consumers do not trust
  the firm itself.
• Aside, European consumers generally dont trust
  govt labels, but U.S. consumers do.
• Crespi Marette, Teisl Roe, Priest et al.

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Does the label mean anything?

• Credibility is just one issue. Another is
  whether the attribute itself is more than just
  fluff does the label really mean anything?
• Sustainable meaningless
• Bird Friendly meaningless
• Shade Grown meaningful (but few people know
  what it is).
• Organic meaningful
• Cruelty Free meaningless
• Grass Fed meaningless
• Grass Fed Only meaningful
• Natural ???

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Does the label mean anything?

• Meaning gets trickier with regional and
  production appellations.
• For regional labels (e.g. Napa, Sonoma, or
  Calaveras wine), the labels meaning is only as
  important as what the producers of that region
  are able to promote or what outside agents are
  able to verify.
• Exs. To many, Parma is a strong signal for ham
  Vidalia for onions, Napa for wine.
• But, what about Stockton for asparagus? Iowa for
  beef?.
• Big bonus to Iowa beef is that Japanese
  wholesalers already ask for I-80 beef. So the
  signal is already there. See Hayes Lence

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What makes a label a success?

• Common themes emerge in the literature.
• Label is Standardized
• Claim is Verifiable
• Claim is Accurate
• Meaning is Succinct
• Label is Legible
• Consumer Education
• Think about the US nutrition label, for example.

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Too many labels

• Label proliferation is as mind-numbing as too
  much noise.

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Label Proliferation NOISE.

• Label proliferation occurs when a consumer is
  inundated with too many labels.
• Ex. Big problem in Europe with regional
  appellations on wine.
• There are so many regional appellations (450!)
  for moderately priced French wines, that the
  appellations have become mostly meaningless to
  consumers.
• Not surprisingly moderately priced French wines
  are losing market share to Californian,
  Australian and Chilean brands.

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Label Proliferation

• Three quarters of all wine produced in Europe
  now bears a specific geographic reference. The
  more this happens, the more devalued it becomes,
  and the less consumers want to pay for it.... We
  wanted to use AOC to help differentiate our
  offering in the New World, but now they have it
  too.
• Patrick Aigrain, wine economist, April 26, 2005

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Conflicting Messages

• Label proliferation can also add to confusion
  when consumers must choose among competing
  claims.
• Ex. The use of GMOs can be Environmentally
  Sound and Sustainable but in the U.S. cannot
  be Organic which to many consumers means GMO
  must be environmentally unsound leading them to
  pass on GMO in favor of Natural or Earth
  Friendly both of which can sometimes be neither
  Environmentally Sound nor Sustainable. HUH?
• Confounding messages lead to reduced premia.
• Loureiro et al. Tesil Roe

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Beware Eco-Labels!!!

• Of all labels studied by economists thus far, eco
  labels seem most prone to label confusion.
• Ex. Shade grown, Bird Friendly, California
  Clean.
• Practical impact is that if producers tie their
  appellation strictly to environmental
  friendliness, premia may be short lived because
  such claims are
• too easy to duplicate, and
• too easy to obfuscate.

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Piggybacking Helps.

• Regional/Producer appellations with little
  consumer identification are helped if they
  piggyback on another label that consumers know
  better
• In other words, Dont go it alone.
• Ex. 1 - Producer groups in France who have added
  their appellation to the popular Label Rouge
  program for quality obtain higher premia than
  those groups who use only the regional
  appellation label.
• Recent INRA study.
• Ex. 2 - Teisl Roe find that adding the USDAs
  organic logo to and eco-labeled product
  significantly increases premium.
• As the USDA Organic or Certified Angus Beef
  labels become better known for standardized
  quality, U.S. producer groups with regional
  appellations may be wise to piggyback on them.

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Our Survey Says...

• The economic literature on consumer preferences
  for food attributes shows that surveys can
  provide guidance on preferences but little
  guidance on WTP.
• Ex. Consumers will say, Yes, Id pay a lot more
  for that... but when given the chance, pay a lot
  less... or nothing.
• While surveys often show large premia, typical
  revealed premia are much less in the
  neighborhood of 3-5.
• See surveys in Crespi Marette, Lusk et al,
  Henneberry Armbruster.

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How easy is it to duplicate a product?

• Easy for a Taste/Hard for a Region.
• Alexander Valley, Napa Valley, Iowa Beef, Parma
  Ham, Vidalia Onions, Washington Apples (though
  Wash Apples, dont get a premium anymore).
• Premia can exist and remain for products that are
  first in the minds of consumers.
• Not logical, but often true.
• Why buy the NEXT Taco Bell when I can buy
  Taco Bell?-Lynch
• Premia on products that have generic substitutes
  shows this to be true for many brands.
• Even if substitutes are perfect Bayer gets a
  premium over chemically identical generic aspirin.

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Controlling Quality may be Easier than
Controlling Production or Number of Producers

• If profits go up, how will producers keep
  newcomers out?
• With regional appellations, this may be possible
  if there is a limit on available land.
• With production methods, this is much harder,
  though not impossible (see Dermots work on
  this).
• Marketing orders?
• Can control quality and to some extent production
  in the short run (but not number of producers).
• Survey of marketing order market power in Crespi
  Sexton shows that markups from monopoly
  control are small.

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Room for optimism

• Consumer Incomes are Up.
• Budget Share for Food is Down.
• Those are good things for niche markets.
• More money available for a food budget of
  perceived higher quality foods.
• Anecdote 1. Organic is fastest growing segment
  of retail food market (organic natural 48
  Billion).
• Anecdote 2. Whole Foods is building new
  supermarkets while Safeway is closing
  supermarkets.

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• Grocery-store chains such as Safeway Inc.,
  Albertsons Inc. and Fred Meyer's owner, The
  Kroger Co., grew into national forces over the
  past century by marketing to the masses.
• But the giants are losing their grip.
• Shoppers have locked into new habits, rolling
  their carts into an ever wider array of food
  stores at either side of the retailing spectrum.
  At one end, they steer toward lower prices at
  big-box discounters Costco Warehouse, WinCo
  Foods, Wal-Mart Supercenter, SuperTarget. At the
  other, they search out upscale and organic
  offerings at specialty stores, from
  Portland-based Zupan's Markets and New Seasons
  Market to national chains --Trader Joe's and
  Whole Foods Markets.
• The Oregonian, June 12, 2005

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Room for optimism...

• Dont need to be Pepsi, just need to have a
  defensible niche.
• Whole Foods Market (Mkt. Cap.7.7B) and Wild
  Oats Market (Mkt. Cap.325M) actively source
  local/regional foods when they open new stores.
• Studies of promotion checkoffs (for the most
  part) show joint producer promotions can raise
  industry revenues.
• See Kaiser, Alston, Crespi Sexton.

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So, what does the literature suggest about the
link between appellations income?

• Does the absence of an appellation mean that a
  market does not exist?
• Not necessarily. The key is whether or not the
  attribute is a credence one or not.
• Can an appellation increase profit?
• Yes.
• Will it increase profit?
• ???
• Big issues are quality perception, credibility of
  the claim, label proliferation and noise.