Welcome to module 5 about - Food Labeling - My name is Luisa Menapace and I am a Professor for Governance in International Agribusiness at the Technical University of Munich. This module is divided into 2 lessons. In the first lesson, we are going to talk about food labels as a market-based tool to solve market failures due to asymmetric information and will introduce the concept of firm reputation. In the second lesson, we will discuss in more detail the concept of firm reputation based on trust. Let’s start with Lesson 1: After completing the lesson you will be able to explain the role of food labels in avoiding market failures due to asymmetric information. In addition, you will be able to explain intuitively the concept of firm reputation based on trust and the concept of firm reputation based on signaling. In module 4, you might remember, we learned that often consumers have less information than producers regarding the quality or some specific feature of food products. In such cases, we say, there is asymmetric information. Think, for example, about a situation in which you want to purchase a wine. Potential asymmetry of information in this context might regard experience attributes, such as taste, or credence attributes, such as the method of production For example whether the wine is organic or conventional. Recall that experience attributes are attributes that you can learn about by experiencing or tasting the product. Once you have tried the wine, you know whether you like it or not. Credence attributes are attributes that you cannot verify by trying the wine. For example by tasting the wine, you will not learn if the wine is organic or not. In reality when you purchase a wine, you do not really see a naked bottle like the one in this picture but rather, you are confronted with a situation that my look like this shelves of wine bottles with colourful labels that carry various information, for example regarding the type of wine, the vintage, the name of the producer, the brand and so on. The presence of several labels is typical for many types of food products as well, not just for wine. Often, food labels provide information to potential buyers that help prevent or alleviate potential market failures due to asymmetric information. Some types of labels are used to solve asymmetric information concerning experience attributes. Other types of labels are used to solve asymmetric information concerning credence attributes. Let us consider some examples. On the screen, you see five links to food labels. Take a few minutes to visit these web pages and look at these labels. I did not display the labels directly on the slide because of property rights issues. Try to sort these labels into homogenous groups (or types) and associate each type of label with a type of attribute (either credence or experience). Try to answer the following questions: Which labels can solve asymmetric information problems linked to experience attributes? Which labels can solve asymmetric information problems linked to credence attributes? A first distinction that can be made is between certifications and, what I would generally call, “brands”. Example of brands are: the USDA organic Which is the US label for organic product. (corresponding to link 1) and the International Fair-trade certification mark (corresponding to link 2). Brands can also be further divided into individual trademarks and collective marks. An individual trademark belongs to one individual firm, collective marks belong to an organization or an association. Examples of individual trademarks are Lindt for chocolate (link 4) and Moet and Chandon for sparkling wine (link 5). Examples of collective marks are “Obst vom Bodensee”, whose English translation is fruits from the Constance lake, a collective mark that belongs to several companies dealing with the production and sale of products from the Constance lake area. This corresponse to link 3. A third category are so-called Geographical Indications. We will discuss Geographical Indications in detail in module 8. For now keep in mind that these are labels used to identify products from a given geographical origin and that these are collective labels. Geographical Indications do not belong to a given producer or to a given association, but can be used by a collection of producers located in a given geographical area. An example is champagne from the region of Champagne in France This also corresponse to link 5. Note that when I talk about labels, I do not strictly mean the physical label on a product but rather a certification, a trademark, or a Geographical Indication name that is displayed on the food product. So, when it comes to asymmetries of information, which types of labels, do you think, can be used for each type of attribute? You might have already figured out that certifications are typically used to overcome asymmetric information problems related to credence attributes and individual or collective trademarks are used for experience attributes. Finally, Geographical Indications have a mixed function that encompasses both experience and credence attributes. Specifically, when the geographical information is relevant to consumers as a proxy for the quality of the good, for example for the taste of a wine, then Geographical Indications are a tool to address asymmetric information problems in the context of experience attributes. If consumers instead are just interested in the origin per se, for example because they want to support local farmers, then Geographical Indications are a tool to address asymmetric information problems in the context of credence attributes.
