Abstract
Recent controversial policy proposals have aimed at creating a healthier food supply by means of taxation, minimum quality standards or nutritional labeling. Yet the outcomes of such policies strongly depend on the competitive structures and thus substitution processes of individual products within categories, which are not well understood. The objective of this paper is to quantify the source and impact of differentiation in ingredient formulation and especially product health attributes on the competitive positioning of brands under heterogeneous consumer preferences. We employ Berry, Levinsohn and Pakes’ (1995) random-coefficient logit framework to estimate product-level demand for highly differentiated potato and tortilla chips in the U.S. We are specifically interested in the extent to which heterogeneous consumers respond to changes in product formulation, pricing and brand attributes. Our results support the unhealthy-tasty intuition hypothesis to a certain degree with consumers’ utility increasing in sodium and saturated fat levels but decreasing in energy and total fat content. Results further suggest strong impacts of price, brand, and flavor effects on band-level market shares. Our analysis underlines the trade-offs involved in food manufacturers’ decisions to reformulate products in order to comply with policy and public demands for healthier product options that do not sacrifice taste.
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