Information

1
Information Demand

• Aviral Chopra
• Dr. David Bessler
• November 18,2004

2
Demand Estimation

• Demand Function of A
• DA (PA,PS,PC,Y,S,Z)
• PA Price of Product A
• PSPrice of Substitutes
• PCPrice of Complements
• YPer Capita Income
• S Taste and Preferences
• ZOther Factors (Info)

DA (PA,PS,PC,Y,S,Z)
Demand Shifter
Movement along demand curve
3
Demand Estimation

• Demand shift can be in
• Long-term
• Short-term
• Long-Term shift can be due to
• Change in preferences and tastes
• Change in Income
• Better/Cheaper substitute products

Over Period of time Permanent in Nature
OPPORTUNITY TO RESPOND
ALTERNATIVE OPTIONS
4
Demand Estimation

• Short-term shift can be due to
• Change in price of the good
• Change in price of complement/s
• Information (Positive or Negative)

Small time horizon Transitory in Nature
NO OPPORTUNITY TO RESPOND
POTENTIAL FOR PERMANENT CHANGE
LOSS
MOST IMPORTANT IS IMPACT OF INFORMATION ON DEMAND
5
INFORMATION

• Information can be
• Good News
• Bad News
• Good news can increase demand
• Red Wine
• Bad News can decrease demand

6
INFORMATIONBAD NEWS
PROCESS
PRODUCT TEMPERING
TERRORISM
INTENTIONAL
X
MICROBIOLOGICAL
BAD NEWS
PROCESS
FAULTY PARTS IN AUTO INDUSTRY HARMFUL CHEMICALS
IN FOOD PRODUCTS MEDICINES WITH HARMFUL SIDE
EFFECTS
NON-INTENTIONAL
MICROBIOLOGICAL
BACTERIAL INFECTION IN FOOD PRODUCTS
7
IMPACT OF BAD NEWS

• Depends on
• Media Coverage of event
• Greater coverage greater impact
• Intensity of the event
• Severity of the event
• Duration of impact
• Short term
• Temporary change in demand
• Long term
• Permanent shift in demand of the products

8
RESPONSE

• Voluntary Actions
• Concerned Industry formulated self regulatory
  policies
• Regulatory Actions
• Ex-Post VS Ex-Ante response
• Most Policy Changes after the events

9
INTENTIONAL
10
PRODUCT TAMPERING

• The intentional adulteration or corruption of
  goods post production
• Done to create panic
• Extort money through product liability lawsuits

11
THE EARLIEST CASE

• Jaffa Oranges injected with Mercury
• February 1978
• Palestinian Worker injected Israeli Oranges with
  Liquid Mercury
• Publicity resulted in fruit sales plummeted
  throughout Europe

12
THE FAMOUS CASE

• Tylenol Cyanide Deaths Chicago 1982
• 7 people died in the Chicago area between
  September 29th and October 1st
• Died because of Cyanide poisoning after having
  taken Tylenol
• Received more television news air time than any
  incident since the assassination of President
  Kennedy
• The FEDERAL ANTI-TEMPERING ACT enacted after
  Tylenol poisoning
• Cost JJ 100 million

13
OTHER CASES

• Girl Scout cookies with needles April 1984
• Candy Cyanide poisoning in Japan 1984
• Excedrin cyanide deaths in NY Feb 1986
• Lipton Cup-A-Soup cyanide 1986
• Tylenol Cyanide 1986
• Chilean Fruit Scandal Mar 1989
• Goodys Headache Powder cyanide 1992

14
CHILEAN FRUTI SCANDAL

• Fruits that are exported from Chile to USA and
  Japan were injected with Cyanide in March 1989
• Protest against the living condition of poor in
  Chile
• FDA investigation confirmed the claims leading to
  full inspection of fruits and vegetables from
  Chile

15
RESPONSE

• GOVERNMENT
• No policy till TYLNEOL (1983) case became public
  (Ex-Post Policy)
• Enacted Federal Anti-Tempering Act in 1983
• PUBLIC
• Sudden drop in consumption
• MEDIA
• High coverage to these events
• Spurious claims (HOAX) across the country
• Fraudulent tempering claims became a punishable
  offense

16
NON-INTENTIONAL
17
INDUSTRIES AFFECTED

• Main industry impacted by this kind of events are
• FOOD
• PHARMACEUTICAL
• AUTOMOBILE

18
MICROBIOLOGICAL CONTAMINATION

• Microbiological contamination arise due to virus,
  bacteria or Parasites
• Causes immediate health concern for the consumers
• Brief illness
• Severe Sickness
• Death
• Most severely effects older people, infants or
  young ones and people with weak immune system

19
MICROBIOLOGICAL CONTAMINATION

• Most common contamination in Beef, followed by
  Pork and then in Poultry
• Food Safety Inspection Services (FSIS) started
  collecting data since 1982.
• Most recall started in 1983 and more common after
  1988 indicating growth in medical science in
  identifying these diseases

20
SEVERIETY OF FOOD RECALLS

• Three kind of recalls (FDA)
• Class 1 With reasonable probability that
  exposure will cause serious adverse health
  consequences or death
• Class 2 Exposure may cause temporary or
  medically reversible health consequences
• Class 3Not likely to cause any adverse health
  consequences

21
RESPONSE

• CONSUMERS
• Reduction in demand for the category
• Short-term
• CORPORATIONS
• Product Recall
• MEDIA
• Coverage depends on intensity of the event
• HIGH COST TO SOCIETY

22
COSTS

• Costs associated with food borne diseases
• Costs to individuals
• Income and Productivity costs
• Pain and sufferings
• Leisure time losses
• Travel Costs
• Medical Costs
• Industry Costs
• Product recall cost
• Product liability costs
• Reduced product demand

23
COSTS

• Public Health costs
• Outbreak Investigation
• Disease Surveillance
• Clean up costs

24
TOTAL COST

• Costs related with these food diseases varies by
  pathogens
• Average cost per case for Salmonella estimated to
  be 700(Most common).
• Average cost per case for Listeria estimated to
  be 135,000 (Highest).
• Total food borne bacterial diseases estimated to
  be 4.8 billion in 1987

25
FOOD INDUSTRY

• Product recalled
• Hamburgers
• Fruit Juices
• Prepared Meals
• Fruits and Vegetables

26
IMPACT OF FOOD RECALLS

• Small companies are affected more by recall
• Big Companies are not affected by recall mainly
  due to
• Diversification
• Ability to control
• Product recall significantly impacts the demand
  of the products
• Severity of contamination affects the company
• Media Information does not have any significant
  impact alone
• Product recall induces reallocation of
  expenditure within the meat group and across non
  meat group

27
MEAT RECALL FUTURES PRICE

• Beef recalls marginally influences the nearby
  live cattle prices if the recalls are sizeable
  and would cause a serious health hazards
• Price may decline by 0.38/CWT
• It takes roughly five days for the prices to
  recover to the pre-recall level
• Large serious pork recalls may have an immediate
  impact on nearby lean hog prices

28
DRUG RECALLS

• Costs associated with Drug Recalls
• DIRECT COSTS
• Product recall
• INDIRECT COSTS
• Loss of faith in firms products
• Product Liability Suits
• Rebuilding the image
• Spillover effects on manufacturers of substitute
  products

29
DRUG RECALLS

• Capital market loss is related to publicity
  surrounding the recall
• Tylenol 100 million (50 million in product
  recall and 50 million in rebuilding consumer
  confidence).
• More stringent regulations by FDA in future

30
AUTO RECALLS

• COSTS involved with recalls
• Direct costs are very small
• Indirect costs have loss sales and goodwill loss
• Frequency of recall
• Resale value is significantly impacted
• Industry wide impact of recall as competitors are
  also affected
• Self regulation

31
AGROCHEMICALS

• Pesticides/Fungicides affects environment or
  health
• Captan and Iprodione Human Carcinogens
• DDT Environment
• Endosulfan Hormonal imbalance
• Alar Human Carcinogens

32
IMPACT

• GOVERNMENT
• Ban agrochemical
• MEDIA
• Gives prominence to Controversial Studies
• CONSUMERS
• Generally demand affected in short-term due to
  media coverage
• Long-term demand changes depending on the
  severity of the problems

33
ALAR APPLES

• Alar pesticide is used in apples and peanuts
• High level of exposure can cause cancer
• Very high media coverage
• Advertisement by National Resource Defense
  Council
• Two episodes of 60 minutes
• Cover of Time
• Major Newspapers

34
ALAR APPLES

• CONSUMERS
• School dropped apples from their menu
• Parents poured apple juice down the drains
• APPLES SALES PLUMMETED
• PRODUCERS
• Advertised in leading newspaper with technical
  details of very small level
• Advertisement Expenditure 3million

35
VARIOUS STUDY

• Impact on
• Demand of the product
• Price of the product
• Share price of the Company

36
IMPACT ON DEMAND

• The impact of BSE on the demand of beef and other
  meats in Great Britain.
• (Applied Economics, 1996)
• Impact of meat product recalls on consumer demand
  in the USA.
• (Applied Economics, 2004)

37
DATA MODEL

• U K STUDY
• Beef, Pork, Lamb Poultry
• Per capita data on price and Expenditure shares
• Quarterly Data from 1961 to 1993
• Almost Ideal Demand System (AIDS) model was used

38
DATA MODEL

• U S A STUDY
• Beef, Pork, Poultry Other Consumption goods
• Price and Quantity
• Quarterly Data from 1982 to 1998
• ROTTERDAM MODEL

39
MODELS IN DEMAND ANALYSIS

• MOST POPULA MEAT DEMAND MODELS ARE
• ROTTERDAM MODEL
• ALMOST IDEAL DEMAND SYSTEM (AIDS)
• ASYMPTOTIC IDEAL MODEL (AIM)
• DIRECTED GRAPH MODEL (DGM)
• VECTOR ERROR CORRECTION MODEL (VECM)

40
MODELS IN DEMAND ANALYSIS

• Forecast Evaluations in Meat Demand Analysis,
  Agribusiness, 2003
• VECM performs best

41
DEMAND ESTIMATION IN UK
42
DATA

• MONTHY DATA
• Jan 1985 to Dec 2002 (216 Data points)
• MEAT
• Beef, Pork, Poultry and Lamb/Mutton
• Prices and Quantity
• THREE LEVELS
• FARM PRICE (PP)
• WHOLESELL PRICE (WP)
• RETAIL PRICE (RP)

43
MODEL

• We will be using
• VECTOR ERROR CORRECTION MODEL (VECM)
• DIRECTED GRAPHIC METHODS (DGM)

44
BEEF GRAPHS
45
LAMB GRAPHS
46
PORK GRAPHS
47
POULTRY PRICES
48
STATIONAITY TEST
49
DICKY FULLER TEST
?XTa0a1XT-1
H0 a10
Critical Value at 5 Significant level is -2.89
a1 estimated using Ordinary Least Square (OLS)
50
AUGUMENTED DICKY FULLER TEST
H0 a10
Critical Value at 5 Significant level is -2.89
a1 estimated using Ordinary Least Square (OLS)
Lags (p) are determined by minimizing Schwarz
Loss metrics
51
DF ADF TEST..BEEF
Non-Stationary Series
Stationary Series
Price series are non-stationary as
expected Quantity slaughtered at farm level is
Stationary series Beef Production is
non-stationary by DF and Stationary by ADF
52
DF ADF TEST..PORK
Non-Stationary Series
Stationary Series
Price series are non-stationary as
expected Quantity slaughtered at farm level is
Stationary series Pork Production is
non-stationary by DF and Stationary by ADF
53
DF ADF TEST..LAMB
Non-Stationary Series
Stationary Series
Surprisingly Price series are stationary by DF
and Non-stationarity for WP PP using ADF
Quantity slaughtered at farm level is Stationary
series Lamb Production is non-stationary by DF
and Stationary by ADF
54
DF ADF TEST..POULTRY
Non-Stationary Series
Stationary Series
Retail Price series is Stationary by DF and
Non-stationarity by ADF PP is Non-stationary