Essays on the Economics of Food Product Quality

Abstract

This dissertation contains three essays in applied industrial organization and demand analysis. The first and second essays are theoretical papers, while the third essay is empirical paper. The first essay models a quality assurance system for two agents: a third-party certifier (TPC) and certified firms. A dynamic model is used to investigate the path of the TPC's monitoring effort and firm's quality when collective reputation affects the returns for the TPC and firms. The model links the TPC and firms by applying a differential game with two different decision rules: open-loop and Markovian strategies. Findings show that as the number of certified firms increases, a free-riding problem may lead to reduced industry reputation. When the industry has a good reputation for producing high quality, the TPC should undertake higher monitoring effort to prevent free-riding. The second essay explores how transaction experience influences the competition between a short and long supply chain. Some consumers gain utility from purchasing a product related to a certain shopping location because the interaction with producers gives a benefit to them. Hotelling's location model with a two-stage game is modified to analyze transaction experience as a proxy for the chain length, and links the interaction between producers and consumers through two-sided network effects. The effect of transaction experience on network effects is investigated in two cases: exogenous and endogenous network effects. One important finding is that firms prefer less differentiation when experience interacting with network effects is introduced. The third essay examines whether there is heterogeneity of consumer preferences for local/organic food with alternative distribution channels and distance in discrete market segments using the latent class model. Results show that consumers are heterogeneous in their preferences within and among types of products. In general, most consumers are willing to pay more for a product with fewer food miles and the certified organic attribute. An important finding is that organic and convenience are more important than distance. Most consumers prefer shopping at supermarket chains, while a few consumers gain utility from purchasing local/organic products through short chains. These findings suggest a new consumer segment that values the benefit from distribution channels.