Consumer Welfare Loss Research Articles

Retail assortment under demand shocks: Evidence from the US yogurt market

AbstractDespite extensive research on retailers' price responses to demand shocks, much less is known about their non‐price responses. Using heterogeneity in timing, location, and magnitude of income and wealth shocks associated with the 2008 Great Recession, we explore how US retail stores adjusted product offerings under local demand shocks. We find that stores offer fewer products and varieties besides lowering prices. Using a structural demand model, we quantify the net welfare impact of the price and assortment adjustments. On average, the consumer welfare losses from variety reduction more than offset the welfare gains from price reductions.

Unhealthy food, regulations, and consumer welfare: The US microwaveable popcorn market

AbstractDue to significant health concerns, governments across the world have taken measures to regulate dietary trans fat, for example, through bans and ad‐valorem taxes. We assess the effectiveness of these two strategies and measure their ensuing welfare implications. We estimate a structural demand and supply model for the microwavable popcorn market using NielsenIQ Homescan data. Applying the recovered consumer preferences and marginal costs, we find a ban and a 35% tax result in similar levels of welfare loss and trans fat reduction. A 10% tax can still significantly reduce trans fat consumption (around 48%), while the associated consumer welfare loss is substantially smaller.

The ripple effect of animal disease outbreaks on food systems: The case of African Swine Fever on the Chinese pork market

Research on animal health economics has emphasised the importance of accounting for the indirect economic effects of animal disease outbreaks. Although recent studies have advanced in this direction by assessing consumer and producer welfare losses due to asymmetric price adjustments, potential over-shifting effects along the supply chain and spill-overs to substitute markets have been under-examined. This study contributes to this field of research by assessing the direct and indirect effects of the African swine fever (ASF) outbreak on the pork market in China. We employ impulse response functions estimated by local projection to calculate the price adjustments for consumers and producers, as well as the cross-effect in other meat markets. The results show that the ASF outbreak led to increases in both farmgate and retail prices but the rise in retail prices exceeded the corresponding change in farmgate prices. Furthermore, beef and chicken prices also rose, demonstrating the spill-over impacts of the outbreak to other markets. Overall, the evidence illustrates that a disruption in one part of a food system can have significant ripple effects across other parts of the system.

Platform Refund Insurance or Being Cast Out: Quantifying the Signaling Effect of Refund Options in the Online Service Marketplace

This study examines whether and how an online service marketplace can leverage refund options endorsed by different parties (i.e., the platform or sellers) to address the “lemons” problem that is due to the intangibility, variability, and unreturnable nature of the services sought. We show that both platform refund insurance and a seller-guaranteed refund increase service demand, with platform refund insurance as the more effective option and hence having a more effective signaling mechanism, and that sellers with a better reputation or less popularity might benefit less from refund options. An investigation on further use of the more effective refund option, a “having platform refund insurance or being cast out” policy (i.e., retaining platform refund-insured sellers but expelling uninsured ones), reveals the effectiveness of this policy in filtering out low-quality sellers, shown as an improved quality of sellers on the platform due to new sellers’ replacing those who were expelled, yet a cost (i.e., a loss in demand and consumer welfare) for the platform due to the changes in characteristics (e.g., price) of sellers. This cost, however, is lower than the benefit from the improved quality of the sellers, so that the platform’s overall performance improves.

Welfare impact of climate change on capture fisheries in Vietnam.

Fisheries are forecasted to shrink in the tropics due to climate change. In Vietnam, fisheries are a pro-poor economic sector and essential nutrition source; however, welfares of producers and consumers in the climate change context are not well understood. While most studies focus on the gains or losses of total products and revenues, this paper pays additional attention to the changes in surpluses of market players in the long run. A combination of the production function, demand and supply functions, and partial equilibrium analysis is employed to measure the production and welfare impacts based on time series data from 1976 to 2018 and a Vietnam household living standards survey in 2018. The results show that relative to the present, catch yield is likely to reduce 35%-45% by mid-century and 45%-80% by the end of the century. Consumers may lose their surplus of 7-9 billion USD (PPP, 2018) by 2035 and 10-18 billion USD by 2065 due to supply reduction, while producers may gain additional profit of 3.5-4.5 billion USD by 2035 and 5-9 billion USD by 2065 owing to a price increase. The research findings suggest that Vietnam could impose measures to limit capture effort, as set out in the Law of Fisheries 2017, without harming fisher welfare. The expansion of aquaculture could reduce the gap between supply and demand of wild fish to mitigate consumer welfare loss; however, this impact is still ambiguous.

Welfare impact of asymmetric price transmission on rice consumers in Bangladesh

AbstractThis study investigates asymmetric price transmission (APT) in the rice market in Bangladesh using monthly price series at farm, wholesale, and retail levels from October 2005 to June 2017 in a nonlinear autoregressive distributed lag model (NARDL). The results indicate a significant asymmetric relationship across price at retail, wholesale, and farm levels in the long and short term. While wholesalers/millers benefit from the imperfect price transmission at the expense of farmers, retailers gain over wholesalers/millers. We find that the consumer surplus decreases from a price rise at the wholesale or farm level, but consumers do not enjoy a proportional increase in their surplus from a price reduction. The study reveals that the consumer welfare loss due to APT along the rice value chain of Bangladesh is equivalent to US$89.05 million per month. This estimated aggregate welfare loss requires both the attention of decision‐makers and corrective actions.

Multimarket Contact and Welfare Implications for Airline Passengers

Abstract When conducting routine welfare analysis, regulators typically associate the exercise of market power to internal market characteristics such as market shares. However, some researchers argue that factors that are external to a market such as contact across markets may have an impact on market outcomes. An interesting but unanswered question is: how do cross-market factors such as multimarket contact affect consumer welfare? Using a nested logit demand model for air travel, we are able to monetarily estimate the consumer welfare effects of multimarket contact. We find that multimarket contact results in a consumer welfare loss of $0.57 per contact. Extrapolating this welfare cost across consumers and across products proves to be quite sizeable. These negative welfare effects are stronger in long haul markets.

Quality determinates of rice price in open bag markets in Sub-Saharan Africa

PurposeWeaknesses in the grades and standards system in low-income countries across Sub-Saharan Africa undermine the transparency of agricultural markets. In the Democratic Republic of the Congo (DRC), Ghana and Mozambique rice is predominately sold in open bags and if rice price does not reflect its quality, then inefficiencies may lead to consumer welfare losses. Importantly, it is possible that impoverished communities are priced out of the market due to inflated and inefficient prices. The objective of this study is to examine determinates of rice price by estimating the impact of selected rice quality attributes on rice prices in Democratic Republic of the Congo, Ghana and Mozambique.Design/methodology/approachWe collected 363 rice samples from open air markets in Bukavu (DRC), Nampula (Mozambique) and across Ghana in 2019. Each rice sample was analyzed in a food science lab for the quality attributes: percentage of chalk and brokens, chalk impact, length and length-to-width ratio. We used multiple regression analysis to estimate if and to what extent quality attributes were the drivers of price.FindingsFindings suggest that there are irregularities in the Ghanaian market for broken rice and that regardless of quality, imported rice is priced higher than domestic rice. In the DRC and Mozambique, our results indicate price is driven by length and length-to-width ratio in the former and length-to-width ratio in the latter.Research limitations/implicationsRice samples were purchased from market vendors and thus consumer preferences for attributes were not revealed.Originality/valueThese results provide valuable insight to policymakers regarding the need for proper labeling and regulation of open bag rice sales in an effort to increase consumer welfare and improve food security.

Consumer welfare consequences of the California drought conservation mandate

AbstractWe measure consumer welfare losses from reductions in water use following California's conservation mandate in 2015, which imposed utility service area‐specific conservation targets of 4% up to 36%. We document imperfect compliance with the mandate and discuss factors that may explain the pattern of reductions ultimately observed. The basis for calculating welfare losses is an econometric model of residential water demand that yields local demands with elasticities ranging from −0.56 to −0.10. In terms of economic efficiency, we estimate a 20% gain in consumer welfare under the efficient allocation of conservation reductions relative to the observed pattern of reductions.

The dynamic effects of price support policy on price volatility: The case of the rice market in China

AbstractThis study examines the economic and welfare effects of a commodity price support policy. It conceptually and empirically evaluates the effects of the domestic pricing policy on the distribution of commodity prices, with an application to the price support program in the Chinese rice market. The empirical analysis relies on a Censored Quantile Autoregression (CQAR) model, which provides a refined and flexible representation of the evolving distribution of prices under a price support program. Based on monthly data over the period 2000–2018, we develop and estimate an econometric model documenting the price effects of policy interventions. We study how a price support program affects price distribution both in the short term and long term. We find that such a program has reduced the domestic rice price volatility, evidenced by lowered variation and increased right‐skewness of the price distribution. We also show how China's rice programs' high price support level during the period 2008–2015 caused significant censoring effects and price enhancement with adverse impacts on consumer welfare across all income levels. We further examine alternative situations where a moderate price support level can reduce the long‐term mean price without generating consumer welfare losses. Our analysis and findings have implications for the implementation of agricultural price support policies in many developing countries.

Behind the veil: Social desirability bias and animal welfare ballot initiatives

Farm animal welfare (FAW) issues are becoming increasingly political in many countries, as evidenced by the increased use of regulations, legislation, and ballot initiatives. Available empirical evidence however, indicates that consumer valuation of improved animal welfare is low, although positive. As a result of the sensitive nature of FAW issues, public preferences for improved FAW standards can be susceptible to social desirability bias leading to disparities between regulatory standards and the public’s “true” preferences. Given the potential negative impacts of high mandated FAW standards on food costs and the associated consumer and producer welfare losses, this study examined the issue of effective public preference elicitation in animal welfare ballot initiatives. Specifically, we examined social desirability, the tendency to conform to the social norms, and its role in generating overenthusiasm in the support for FAW issues and policy instruments. We used data from an opt-in survey of respondents and compared results of a List Experiments (LE) to a conventional (direct) survey format. Our results show that public support for the FAW issues examined was consistently overestimated when elicited with the conventional survey format. We discuss the implications of these outcomes for animal welfare policy and offer suggestions to researchers and practitioners eliciting preferences in other sensitive food policy contexts.

Local Protectionism, Market Structure, and Social Welfare: China’s Automobile Market

This study documents the presence of local protectionism and quantifies its impacts on market competition and social welfare in the context of China’s automobile market. A salient feature of China’s auto market is that vehicle models by joint ventures and state-owned enterprises command much higher market shares in their headquarter provinces than at the national level. Through county border analysis, falsification tests, and a consumer survey, we uncover protectionist policies such as subsidies to local brands as the primary contributing factor to the observed home bias. We then set up and estimate a market equilibrium model to quantify the impact of local protection, controlling for other demand and supply factors. Counterfactual analysis shows that local protection leads to significant consumer choice distortions and results in 21.9 billion yuan of consumer welfare loss, amounting to 41 percent of total subsidy. Provincial governments face a prisoner’s dilemma: local protection reduces aggregate social welfare, but provincial governments have no incentive to unilaterally remove local protection. (JEL L24, L32, L62, O14, O18, P25, R12)

Analysis of China’s Soybean Import: Based on the Perspective of Welfare Economics

China’s soybean import meets the growing nutritional demand of Chinese residents, but the continuous increase in soybean import quantity has also caused disputes about over import. The continuous importation of soybean in China gradually forms a path dependence on some major exporting countries. On the analytic basis of soybean supply and demand in China, this paper employs CR index and HHI index to measure the import concentration of soybean, and analyzes the monopoly pricing mechanism of international soybean by adopting welfare economics method. The results show that the imported soybean has gained strengthened monopoly in China’s market, thus increasing the risk of consumers’ welfare in loss. From the demand perspective, the loss of consumer welfare can be reduced by lessening soybean demand and increasing demand elasticity. From the perspective of supply, the same objective can be also achieved by increasing market competition in diversification and reducing monopoly transaction costs. As a result, some policy suggestions can be thus put forward: firstly, it’s suggested to control the importation of soybean and augment the imported alternative products. Secondly, it’s recommended to reduce the transaction cost of the major exporters to China, and to promote an imported strategy in diversification by strengthening the cooperation with countries that join in the “belt and road initiative”.

Welfare impacts of increasing teff prices on Ethiopian consumers

AbstractTeff is an ancient grain primarily produced in Ethiopia and providing more than 10% of the total calories consumed in the country. The grain is considered as “super grain” due to its nutritional qualities, and it has seen an increase in its demand and price in recent years. These trends raise public concerns about the affordability of the grain and the prevalence of food insecurity in Ethiopia. Therefore, we investigate the impacts of increasing teff prices on consumers’ welfare by regions. Using data from two waves of the Ethiopia Socioeconomic Survey 2013–2014 and 2015–2016, we examine the consumption patterns of cereals in Ethiopia and estimate a two‐stage structural demand system. We find that teff is the most own‐price inelastic grain in Ethiopia and an increase of 10% in teff prices will reduce consumer welfare by 0.81, 1.29, and 1.73 Birrs per week for the average rural, town, and urban consumers, respectively. These estimates correspond to 1.64, 2.31, and 2.46% of their weekly food budgets. We also find the negative effects of an increase in teff prices are smaller for the lower‐income groups as they have relatively lower expenditures on teff. Additionally, we analyze the effects of simultaneous changes in wheat and teff prices to measure the extent to which Ethiopia's food policy of distributing subsidized wheat could offset the consumer welfare loss due to an increase in teff prices.

The Effects of Usury Ceilings on Consumers Welfare: Evidence from the Microcredit Market in Colombia

Interest rate caps, also called usury ceilings, are a widely used policy tool to protect consumers from excessive charges by loan providers. However, they are often cited as a barrier for the advancement of financial inclusion, as they may reduce the incentives to provide loans to lower-income borrowers and and to invest in branching networks, particularly in remote and isolated locations. In this paper, I exploit a change in the usury ceiling applied to micro-loans in Colombia to understand the effects of this policy across geographic markets. To quantify the welfare implications of this policy, I structurally estimate a demand and supply model that incorporates the changes in size and composition of the potential market caused by this policy change, in a context where the distribution of branching networks has a crucial role in the optimal pricing strategies of loan providers. I find that the policy generated an increase in consumer surplus at the national level that is explained by greater credit availability for riskier borrowers and the expansion of branching networks in areas that were previously under-served. A counterfactual exercise reveals that the welfare gains associated to this policy depend greatly on additional investment in branching networks, as the opening of new branches in some locations is needed to compensate the consumer welfare loss associated with the subsequent increase in interest rates after the relaxation of the ceiling.

Tariffs and the risk of invasive pest introductions in commodity imports: Theory and empirical evidence

We investigate using tariffs as corrective taxes to reduce risks from biological invasions due to expanded world trade. A theoretical analysis indicates that higher tariffs have ambiguous effects on invasive pest introductions. An econometric analysis using data from US Department of Agriculture surveillance screening indicates that tariff rates exert a negligible influence on expected invasive pest introductions from commodities currently facing positive tariffs. Removal of duty free status would decrease expected pest intercepts but undermine other goals of US trade policy and lower consumer welfare. Consumer welfare loss is on the order of $38 million per expected intercept avoided.

The Impact of Implementing a 25-Year Reversion/Termination Right in Canada

Canada is actively considering legislation to limit the enforceable length of copyright transfers. Under current proposals, authors would either automatically get back their copyrights twenty-five years after a transfer or would have the opportunity to exercise an American-style termination right at year 25. This paper reports previously unpublished data from UK and Canadian book markets on the negative effect of term length on the in-print status of titles and also presents new data on the market effect of existing reversion rules deriving from the 1911 Imperial Copyright Act. Data on Canadian musicians who have used the US termination right to regain their US copyrights is also presented. The report concludes that some portion of consumer welfare losses caused by term extension in Canada may be offset by the adoption of a termination right. Although the report was prepared at the request of Canadian Heritage, a branch of the Canadian government, it represents only the views of the author.

Combined fiscal policies to promote healthier diets: Effects on purchases and consumer welfare.

Taxes on unhealthy foods and sweetened beverages, as well as subsidies to healthy foods, have become increasingly popular strategies to curb obesity and related non-communicable diseases. The existing evidence on the welfare effects of such fiscal policies is mixed and almost uniquely focused on tax schemes. Using the 2016-2017 Chilean Household Budget Survey, we estimate a censored Exact Affine Stone Index (EASI) incomplete demand system and simulate changes in purchases, tax incidence, and consumer welfare of three different policy scenarios: (1) a 5 percentage point additional tax on sweetened beverages (currently taxed at 18%) and a new 18% tax on sweets and snacks, (2) a healthy subsidy by zero-rating fruits and vegetables from the current 19% value-added tax, and (3) a combined (tax plus subsidy) policy. Under full pass-through of these policies, the combined scheme captures the incentives to switch purchases from both single-policy alternatives, resulting in a net welfare gain and subsidy transfer for the average Chilean household. In terms of welfare, low-income households strictly benefit from a combined policy, while high-income households experience a small consumer welfare loss, resulting in re-distributional effects.

Exploitative Contracting in a Life Cycle Savings Model

Pension reforms in OECD countries endow individuals with more responsibility for their financial security in retirement, raising concerns about their ability to select appropriate pension arrangements and save adequately. This paper analyses the interaction between a present-biased individual and a profit-maximising financial provider in order to examine the properties of exploitative savings contracts and the impact of common policy interventions. Using a tractable theoretical model, I find that naive present-biased agents are offered contracts that are `inefficiently cheap' (low-yield, low-fee) when the income effect of an interest rate change dominates in the agent's utility function, and `inefficiently expensive' (high-yield, high-fee) otherwise. Subsequently, I embed the interaction with a pension provider in a numerical life-cycle framework with hyperbolic discounting. Under the benchmark calibration of the model, the savings contract prevailing in market equilibrium is Pareto inefficient and reduces the agent's pension wealth by 10%, lowering expected annual consumption in retirement by 3%. This generates a loss of consumer welfare corresponding to 0.18% of annual consumption.

Tariffs and the Risk of Invasive Pest Introductions in Commodity Imports: Theory and Empirical Evidence

Expanded world trade carries with it increased risks of biological invasions and the ecological and economic damage that accompanies them. The economics literature has suggested that it might be desirable to use tariffs as corrective Pigouvian taxes to reduce those risks. This paper conducts a theoretical and empirical investigation of that proposition and provides the first comprehensive analysis of the potential effectiveness of tariffs as a measure to reduce the arrival of invasive pest species. A theoretical analysis focusing on individual shipments indicates that the effect of higher tariffs on invasive pest introductions is ambiguous and depends on whether marginal pest abatement cost is more or less responsive to changes in shipment volume and pest levels than is the marginal loss from expected pest interceptions. The theoretical framework provides the foundation for an econometric model of the effects of tariffs, shipment value, and duty free status on the risk of invasive pest introductions in import shipments of fruits and vegetables. We estimate the model using data from surveillance screening conducted by the Animal and Plant Health Service of the US Department of Agriculture from 2005-2014. Shipment data is used to separately estimate the responsiveness of the number of shipments to changes in the tariff rate and the removal of duty free status. The estimated parameters of these two models are then used to calculate the effects of raising tariff rates/removing duty free status on the probability of invasive pest detection and on the expected number of invasive pest detections per year for commodities differentiated by type, region of origin, growing season, and port of entry. For commodities currently facing positive tariffs our empirical analysis shows that tariff rates exert a negligible influence on the probability of detecting an invasive pest and on the annual number of shipments. Raising tariffs on these commodities would have a small effect on the expected number of invasive pest introductions. For commodities that currently enter duty free, our analysis suggests that removal of duty free status would reduce both shipments and intercept probabilities, thereby decreasing expected detections per year, especially for commodities currently responsible for the most pest intercepts. But removing duty free status from these commodities would likely undermine other goals of US trade policy as well as lowering consumer welfare due to higher fruit and vegetable prices and less variety in winter diets. We estimate trade elasticities for a subset of commodities and find the consumer welfare loss to be on the order of $14 million per expected intercept avoided.