Product Labeling, Consumer Willingness to Pay, and the Supply Chain
11.3 Willingness to Pay for Labeled Products
What exactly do consumers value when purchasing a more expensive labeled prod- uct rather than an otherwise identical unlabeled product? Knowledge of a goods production method may yield two types of benefits to consumers. Consider a GMO product (labeled “GMO Free”) and the potential types of benefits2. The consumer may believe- despite the best scientific evidence to the contrary- that GMO Free products may be healthier than products containing GMO. Therefore, the consumer may be motivated to choose a GMO Free labeled product to avoid perceived health problems. There are also potential public benefits or costs to purchasing a GMO Free product. Consumers may feel- irrespective of their thoughts on the personal health impact- that a GMO Free product is beneficial to the environment since consuming a GMO Free product avoids the problem of gene leakage associated with GMO crops.
Conversely, choosing a GMO Free product may signal to a consumer that more fertilizers and herbicides were used to produce the product (an environmental bad) relative to the GMO product. Consequently, evaluating consumer behavior around label information and attributing this behavior to public or private benefits is a dif- ficult task, but an area of very active research in environmental economics (see for example (Carlsson et al.2007)).
Irrespective of the type (or mix) of benefit enjoyed by the consumer when pur- chasing a labeled product, the literature has shown that there are several key factors related to consumer willingness to pay. There are numerous papers investigating consumer willingness to pay for labeled products (and the price premium for the credence attribute) in a label setting. Tables11.1and11.2list the studies along with the consumer product being studied. Some notable patterns emerge when examining evidence for willingness to pay. Market based studies such as Teisl et al. (2002) show small price premia compared to studies using experimental or hypothetical methods.
Many of these studies go beyond merely measuring the existence of price premia to investigate the role of certifier, information content, and other factors on consumer
2Rousu examines these various types of benefits Rousu et al. (2007).
Table 11.1 Studies investigating price premia eco-labeled products
Study Product
Anderson and Hansen (2004) Wood products
Anderson et al. (2005) Wood products
Bjorner et al. (2004) Household items
Louriero et al. (2002) Food
Nimon and Beghin (1999) Apparel
O’Brien and Teisl (2004) Wood product Ozanne and Vlosky (1997) Wood products
Teisl et al. (2002) Seafood
Wessells et al. (1999) Seafood
Table 11.2 Studies
investigating price premia for fair trade and social labeled products
Study Product
Elliot and Freeman (2003) General products Becchetti and Rosati (2007) General products
Hiscox and Smyth (2006) Apparel
Kimeldorf et al. (2004) Apparel
Milkman (2004) Apparel
Hicks (2007) Coffee
Basu and Hicks (2008) Coffee
Basu and Hicks Coffee
willingness to pay. Given the strong evidence of the existence of consumer price premia for labeled products, it is useful to consider how these other factors influence consumer behavior.
11.3.1 Credibility, Certifier, and Stringency
One of the most important factors for the existence of a price premium is the credibil- ity of the label. This is closely related to who might be certifying the product. Based on the literature, there doesn’t seem to be any preferred type of certifier (an NGO or governmental body), except that third-party independent certification is preferred by consumers. For example, Roe and Teisl (2007) examines how consumers consider the role of potential label certifiers- a government agency (the US Food and Drug Administration) versus other governmental agencies (for example the US Environ- mental Protection Agency and the Department of Agriculture) and NGO’s such as the American Heart Association. Also, it is interesting that this paper examines the presence versus absence of GMO (one product is labeled “No GMO” while the other is labeled “GMO”). The degree of credibility varied with the information provided on the label. Of particular interest was the difference in providing a positive label (“GMO Free”) versus a negative label (“Contains GMO”). The negative label was always viewed by consumers as being more credible than a positive label regardless of certifying agency. Also, simply supplying personal contact information for the certifier improved label credibility.
At the outset of a labeling program, the label certifier must decide on the degree of label stringency. This decision will likely impact producers as more stringent label requirements are normally associated with higher costs of supplying a labeled product vis-a-vis an unlabeled one. Too stringent a label and firms may leave a product market (under a mandatory labeling scheme) or choose to supply the unlabeled product in a voluntary label setting. From the consumer perspective, more stringent labels may be more valuable than weak labels as consumers will not be willing to pay much for products they perceive as being merely green-washed. For example, in the case of dolphin-safe tuna, the initial label requirements were quite stringent, requiring vessels to avoid dolphins for the duration of complete cruises often lasting as long as 90 days. This stringency has been attributed as being an important factor in the relocation of the tuna fleet to areas of the world where tuna dolphin interactions do not occur. In response, the label stringency was relaxed and tuna was labeled as dolphin safe on a day by day basis3. Ironically, this more relaxed label requirement placed greater record keeping requirements on the supply chain but significantly reduced the cost of label compliance.
The majority of programs are run by non-profit NGO’s followed by a for-profit organization. A very small minority of programs (3%) were run by an industry association. Programs run by non-profits tended to be more closely associate with higher label stringency (more site visits, auditing) (Big Room Inc. and the World Resources Institute2010) and most labels (64%) are third party verified rather than second-party (27%). Nearly all (92%) of the surveyed labels required certification (rather than registration only) (Big Room Inc. and the World Resources Institute 2010). Some products are using labels that purport to be certified by third parties and are not (Terrachoice Marketing2009). It is also notable, that nearly all studied labels violated at least one recommendation from a list of best marketing practices set forth by Terrachoice marketing.
11.3.2 Information Content
Binary versus Performance Labels Perhaps the most importance feature of a la- bel is the information linking the performance of the label (via the supply chain) to consumer demand. One example is performance-based labeling. Beyond merely reporting whether a product passes a labeling requirement or not (a binary label) some product labels include the underlying performance of the labeling program with respect to the environmental or social credence attribute the program purports to influence. One prominent example of a performance label is the the tiered LEAD program for building sustainability- Bronze, Silver, Gold, Platinum certification un- der the LEAD program (Big Room Inc. and the World Resources Institute2010).
3The requirement was for a set by set basis, where the term ‘set’ refers to each time a vessel placed fishing gear in the water.
As a building receives higher certification levels, it is associated with better environ- mental performance with respect to energy use, the impact of construction materials, and environmental impacts of the building’s lifecyle.
Hicks (2007) and Basu and Hicks (2008) examine consumer WTP with varying degrees of information concerning the performance of a coffee fair trade labeling program. They show that compared to a standard binary label, providing additional information about the proportion of program participants and the degree of revenues flowing back to participating farmers leads to a substantial increase in consumer willingness to pay relative to a binary fair trade labeled coffee. The findings indi- cate that if there are easily communicated and understood performance measures, then product labeling that includes performance attributes may lead to even more incentives for producers to switch to desirable production practices.
The issue of performance labeling and increasing levels of consumer demand, while potentially attractive for producers, also places more burden on producers to collect information and certify the processes used in the supply chain. In the case of fair trade coffee, knowledge of each level of the supply chain- from farmers, to the fair trade cooperative, buyers, importers, roasters, and retailers- is necessary in order to assure consumers of the performance of the labeling program. At present, not many of the world’s eco-labels are ready to move to performance based labels and most are of the binary type. While most labels make public their certification criteria (87%) only 46% actively monitor or have studied the environmental impact of their ecolabeling regime (Big Room Inc. and the World Resources Institute2010). As a recent UN study reports, “not only is there a lack of information on the environmental effectiveness of ecolabelling, but there is an almost complete lack of independent data on its trade and economic effects.” (United Nations Environment Programme 2005).
While the information burden on producers can be quite high under a performance- based label, it may help to overcome the closely tied issues of credibility and certifying agency. Under performance labels, the importance of the certifying agency (whether third party, government agency, or industry group) is much less important for consumers when credible performance information is included with the label.
There is also conflicting evidence regarding more detailed performance based in- formation. For example, Roe et al. (1999) found cases where qualitative content trumped actual measured content information concerning nutrition labels for food.
Whether a performance-based label is superior to the traditional binary label really depends on the knowledge of the consumer vis-a-vis the credence attribute being communicated by the label and the ease of measuring the performance attributes.
Specific versus General Labels The intent of most eco-labeling programs is to shift production towards greener less harmful methods of production, and many eco- labeling programs are quite specific as to the credence attribute being communicated by the label. What consumers may want to know is the overall environmental impact of their product purchase relative to an unlabeled product and the presence of a label (for example “Organic”) may not sufficiently inform consumers.
This is particularly germane under recent mandatory carbon labels being intro- duced in Europe (in particular France’s Grenelle 2 Law passed in 2010). While information about a product’s carbon impact is a very important environmental cre- dence attribute, it may not tell the whole environmental story. For example a product may score quite well with respect to its carbon output yet might be particularly bad for biodiversity or water quality impacts. Under Grenelle 2, France has decided that for some product categories, the carbon label must include other environmental data such as water use and biodiversity impacts (Following the footprints2011). Having a broader label that includes an index over all environmental impacts has its appeal but may have some drawbacks as well. First, an index that aggregates over a broad set of environmental impacts may be very difficult for consumers to understand.
Second, measuring an array of environmental impacts or performance data places increasing burdens on the supply chain, and plays into producers’ concerns about label proliferation and burden (iSeal Alliance2010). Despite these concerns, Wal- mart has recently moved toward developing an index label that describes impacts over a variety of environmental and social factors into a single measurable attribute (Rosenbloom2009).
Limits of Information Better and more complete information may not always lead to large changes in consumer behavior. For example, Teisl et al. (2008) examines WTP for eco-labeled durable goods (for example cars). Perhaps the most interesting finding is that information on the environmental performance of cars did not induce people to switch classes (for example sedans versus SUVs) but did help people get greener within a product class. To change car classes, other large-scale changes need to occur, such as a fundamental change in gas prices. Absent that, the authors argue that an education program in conjunction with a product label is perhaps the only way to induce large changes in behavior.
Environmental information was also most influential in consumer choice when linked with private benefits. Bond et al. (2008) examines organic label claims on fresh produce and explores how information on private health benefits versus a label describing only public health benefits is considered by consumers. They find that the private benefits are more important to consumers than the organic label. However, there are also important interaction effects between the public and private benefits of an eco-label. When health and organic bundling occurs in a label there is more than a linearly additive effect with respect to the consumers willingness to pay for the labeled product. Consequently, from the perspective of designing a labeling program, there are benefits to identifying products where public and private benefits occur together and communicating this information on the product label.