Do Warning Labels Make Products More Differentiated and Lead to Higher Prices?

Abstract

Obesity is increasing worldwide and in many countries, the problem is particularly serious among lower income groups. To fight obesity, front-of-pack nutritional warning labels are a prominent regulatory tool that have been implemented or are currently debated in many countries. Existing studies document that warning labels incentivize consumers to substitute away from unhealthy products. However, not much is known about manufacturers’ price re-optimizations in response to consumers’ (dis-)utility for warning labels. Using household purchase data in the cereal category, this paper studies the adjustments of prices after the mandatory introduction of warning labels in Chile. Our model shows that warning labels lead to higher prices of labeled cereals, as is also observed in data. In contrast, prices of unlabeled products tend to drop or at least increase less, incentivizing price sensitive consumers to remain in the category. We decompose post-labeling market share adjustments into a pure label effect that fixes prices at initial levels after regulation and a total effect that accounts for price re-optimizations. Our findings point to self-enforcing effects of a warning label regulation as the price adjustments amplify the policy-maker’s goal of reducing unhealthy nutritional intake, especially because market forces incentivize low-income segments to choose healthier alternatives.