Market and welfare effects of quality misperception in food labels

Abstract

AbstractInformation‐based policies, most prominently labels, reveal credence attributes of food products and, presumably, help consumers make better choices by reducing their misperception of product quality. However, much remains unexamined regarding how firms' strategic reactions to consumers' misperception of quality influence the benefits of information‐based policies. We consider an oligopoly model where heterogeneous consumers can over‐ or underestimate the quality of products in the market, and firms choose quality and prices conditional on consumers' perception of quality. We find that, under empirically prevalent conditions, misperception can increase efficiency in relation to the perfect information case; it does so if (1) it strengthens firms' incentives to provide higher quality, countervailing the chronic underprovision of quality that prevails under perfect information, or (2) it galvanizes competition, reversing another deleterious effect of product differentiation, namely high quality‐adjusted markups that restrain commerce. Our results imply that information‐based policies aimed at curbing misperception, such as requiring or allowing (under voluntary certification) additional information, nudging, and changes in label format, can have deleterious effects on efficiency and, perhaps more importantly, hurt the very consumers they mean to protect.