Abstract
We analyze the organic and non-organic production choices of two firms by considering customers’ trust in organic food products. In the context of customers’ possible willingness to pay a premium price and their mistrust in organic food products, two firms first make choices on offering organic and non-organic food products. If offering organic products, a firm can further invest in the credence system to increase customers’ trust in their organic products. At the final stage, two firms determine prices. We provide serval insights. First, we characterize the market conditions in which only one firm, both firms or neither firm will choose to offer organic food products. We find that the higher the production costs or credence investment costs for organic food products are, the more likely firms are to choose to produce non-organic food products. Second, if it is expensive enough to invest in organic credence, offering organic food products may still be uncompetitive, even if organic production cost appears to have no disadvantage compared to non-organic food products. Third, we highlight how the prices of organic food products in equilibrium are affected by market parameters. We show that when only one firm offers organic food products, this firm tends to offer a relatively low price if organic credence investment is expensive. Fourth, we highlight how one firm’s credence investment decision in equilibrium can be affected by the product type choice of the other firm. We find that the investment in organic credence is lower when both firms offer organic food products compared with the case when only one firm offers organic food products.
Highlights
The consumption of organic food has grown rapidly over the past two decades
We show that, even if organic production cost is the same as that of non-organic production, firms may still have no motivations to offer organic products if it is expensive enough to invest in organic credence
The main results we found are as follows: (1) We show that in equilibrium, whether firms choose to offer organic or non-organic food products depends on the cost efficiencies of production and organic credence investment
Summary
The consumption of organic food has grown rapidly over the past two decades. Global sales for organic food increased from $23 billion in 2002 to 63 billion in 2011, accounting for 1–2% of total food production worldwide [1,2]. Despite the potential premium price, the organic producers (farmers/farming firms) usually face lower yields and higher production cost than conventional (non-organic) ones. Increasing demand and potential premium price for organic food are motivating producers (farmers/farming companies) to transit to organic production, they face the following challenging questions: First, what are the profitable market conditions for producers of organically/non-organically produced food? We show that, even if organic production cost is the same as that of non-organic production, firms may still have no motivations to offer organic products if it is expensive enough to invest in organic credence. We show that when only one firm offers organic food products, this firm tends to offer a relatively low price if it is expensive to invest in organic credence systems.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
