AN E ANALYSIS OF NANOFOOD LABELING · AN ECONOMIC ANALYSIS OF NANOFOOD LABELING Abstract – The paper examines the economic effects of labeling food nanotechnology products using

AN ECONOMIC ANALYSIS OF NANOFOOD LABELING

Abstract – The paper examines the economic effects of labeling food nanotechnology products using an analytical framework of heterogeneous consumers and imperfectly competitive suppliers. Labeling results in increased costs for nanofood producers (the cost effect of the labeling policy), reduced consumer uncertainty regarding the nature of the food product (certainty effect), and can affect consumer attitudes towards nanofoods by being perceived as a warning signal (stigma effect). In this context, nanofood labeling can change the perceived quality differences between nanofoods and their conventional and organic counterparts, with such changes being more salient when the stigma effect is large, when consumers have low awareness of food nanotechnology in the absence of labeling, and/or when competition among nanofood suppliers is more intense. Despite its empirical relevance, the impact of a labeling policy on consumer preferences (and the economic ramifications of such impact) has largely been ignored by the theoretical literature on the economics of labels. Our analysis shows that it matters. Specifically, our study shows that the market and welfare effects of labeling are case-specific and dependent on consumer awareness of, and attitudes towards food nanotechnology before and after the introduction of the policy as well as the relative magnitude of the cost, certainty and stigma effects of nanofood labeling. Our analytical findings also suggest that the effects of nanofood labels on consumer welfare are asymmetric with certain groups of consumers benefiting even when labeling has a stigma effect on nanofoods. JEL classification: L13, Q13, Q18.

Keywords: food nanotechnology; nanofood; food labeling; stigma effect of labeling; consumer heterogeneity; consumer and producer welfare. I. Introduction

A recent report by the Project on Emerging Nanotechnologies (PEN) highlights the rapid growth

of the use of nanotechnology in consumer products, a twenty four percent increase compared to

2010 (PEN 2014).1 This increasing trend has also been observed in the use of nanotechnology in

the agricultural and food sectors with the development of products and applications that could

impact food quality and food safety.2 Nanofood is commonly defined as food that has been

cultivated, produced, processed or packaged using nanotechnology techniques/tools or to which

engineered nanomaterials have been added (Sekhon 2010). According to the PEN inventory, 117

1 The Nanotechnology Consumer Products Inventory that was released in July 2014 contained 1,628 consumer products that had been introduced in the market since 2005. 2 Agri-food nanotechnology applications include: nanosensors for monitoring crop growth and pest control; additives and ingredients that enable changes in food texture, taste, processability and quality; packaging material that release preservatives to extend food shelf life and improve food safety by signaling whether food is contaminated or spoiled. See Sekhon (2010) for a detailed list of agri-food nanotechnology applications.

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manufacturer-identified nanofood products were on the market by July 2014 (PEN 2014).3

Interestingly, none of these products, had to be labeled as a nanofood at that point in time.

Currently, with the exception of the EU where mandatory labeling of nanotechnology

products took effect in December of 2014,4 no other country mandates the labeling of food

nanotechnology products.5,6 Major impediments to labeling have been disagreement on the

definition of nanofoods for regulatory purposes (Fletcher and Bartholomaeus 2011) and lack of

appropriate risk assessment (Cushen 2012). On this latter point, uncertainty exists regarding the

risks of nanotechnology which include the potential toxicity of nanoparticles and their effect on

humans and the environment (Cushen 2012).

The lack of nanofood labeling until very recently could explain, at least in part, why the

vast majority of participants in recent EU and US surveys reported knowing “nothing” or “a

little” about (food) nanotechnology (IFIC 2012; European Commission 2010; Food Safety News

2010; Kahan 2009). The rising number of nanofood products in the market, combined with the

lack of scientific consensus regarding the health and environmental risks of nanotechnology and

low public awareness towards food nanotechnology have given rise to a policy debate as to

whether labeling should be imposed.

Proponents of labeling point to the need of protecting the right of consumers to be informed

and warn that lack of transparency may create a backlash for the food nanotechnology sector if

the public perceives the withholding of information to imply that the technology has undesirable

3 See http://www.nanotechproject.org/cpi/about/background/ for information on food products registered as nanofoods. Nanofood examples include canola active oil, fruit juices fortified using nanoencapsulation and fruit packaged in ripeSense packaging. 4 The word “nano” must be placed on the product's label next to the man-made nanomaterials or nano-ingredients used in food production (Regulation (EU) No. 1169/2011). See infographic for this regulation in Figure A.1 in Appendix A.1. 5 In the US, the Environmental Protection Agency (EPA) released Significant New Use Rule (SNUR) for nanoscale material (EPA 2015) and the Food and Drug Administration (FDA) recently published a guidance document to the food industry on the safety and regulatory status of food substances that include nanotechnology applications (FDA 2014). There are currently no plans to implement mandatory labeling of nanotechnology products in the US. 6 Taiwan is the first country to carry out a certification system, the Nano-Mark, for nano-products that meet specific standards as a means of a voluntary labeling system that promotes safe and high quality nano-products (Chau et al. 2007).

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or harmful consequences. Brown and Kuzma (2013) find that US consumers are willing to pay for

nanofood labeling as a means of avoiding risk, even when the risk is perceived to be minimal.

In contrast, skeptics of the labeling regulation are concerned that the designation of “nano”

on food labels might hinder the acceptability of nanotechnology by consumers who might

perceive it as a warning that nano-ingredients or nano-materials are intrinsically harmful, even

when such risks are not scientifically validated (Gruere 2011; Siegrist 2008). Siegrist and Keller

(2011) support this argument in a study showing that nanotechnology labels resulted in an

increase of perceived risks and a reduction of perceived benefits compared to no labeling.

An adverse consumer response to nanofood labeling might hinder the adoption of food

nanotechnology by producers and/or processors under a mandatory labeling regime and could

discourage voluntary labeling when labeling is not mandated. The recent implementation of

mandatory nanofood labeling in the EU has implications for firms operating in as well as those

exporting to the EU market. Despite the significant and rising interest in the ramifications of a

nanofood labeling regime, there has been, to our knowledge, no systematic analysis of its market

and welfare impacts.

This paper addresses this issue and develops a framework of heterogeneous consumers and

imperfectly competitive suppliers to examine the effects of the introduction of nanofood labeling

on (a) equilibrium prices and quantities of conventional, organic and nanofood products, and (b)

the welfare of the interest groups involved (i.e., consumers and suppliers of nanofoods and their

conventional and organic counterparts). Different scenarios regarding consumer attitudes

towards nanofoods under a no labeling regime and the potential for change in attitudes due to

the introduction of nanofood labels are considered within this framework. Despite its empirical

relevance, the potential impact of food labeling on consumer preferences has been ignored by

the theoretical literature on the economics of labeling (for a comprehensive review of this

3

literature see Bonroy and Constantatos (2015)). Our analysis shows that the effect of labeling on

consumer preferences matters and should not be ignored.

The rest of the paper is structured as follows. Section II outlines the model, section III

derives market outcomes under no labeling of food nanotechnology, section IV analyses the

market and welfare impacts of the introduction of nanofood labels, and section IV discusses

policy implications and concludes the paper.

II. The Model

Our model builds on previous work by Giannakas and Fulton (2002) and Giannakas and

Yiannaka (2008) who examine the market and welfare effects of the introduction of genetically

modified foods when consumer preferences are heterogeneous. In the above studies (and most of

the literature on the economics of labels), consumer attitudes towards food production

technologies are fixed – not influenced by the policies that govern these technologies – and such

that consumers perceive genetic modification as inferior to alternative technologies. To account

for low consumer awareness of food nanotechnology and evidence from the empirical literature

that consumer preferences toward nanotechnology are malleable (Satterfield et al. 2009), our

model considers different scenarios regarding consumer attitudes towards food nanotechnology

and accounts for changing consumer attitudes due to the introduction of a labeling regime.

We consider a market where a food product can be produced using one of three different

production technologies; nanotechnology, conventional or organic production methods.7 We

assume that the nanofood offers unique enhanced attributes that are enabled only by the use of

nanotechnology (e.g., it is packaged in nano-packaging that signals freshness/ripeness or that the

food product is contaminated or spoiled). Consumers can observe (are aware of) the enhanced

7 An example of such a food product already in the market is fruit such as pears that could be conventional, organic or a nanofood if packaged in ripeSense packaging (i.e., packaging that includes a nanosensor that changes color to signal the degree of ripeness). Another example is fruit juice where the nanofood version includes vitamin fortification using nanoencapsulation that enhances the stability of the vitamins, allows slow release and/or targets specific body tissues.

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attributes of the nanofood even when they are unaware of the technology used to generate them

(e.g., in the absence of labeling of food nanotechnology).8 In this market, the organic product is

labeled as such and is thus distinguishable to consumers.

Consumers are heterogeneous and their differentiating characteristic is their attitudes

towards interventions in the production process denoted by [0,1]; the greater is the value of

the greater is consumer aversion to interventions in the production process. Consumers with a

value of equal to zero are indifferent between the three production technologies, i.e., perceive

the three technologies as perfect substitutes, while consumers with a value of equal to one are

those most averse to interventions in the production process. We assume that each consumer

buys one unit of their preferred product, and that this consumption choice accounts for a small

share of their budget. The consumer utility associated with the consumption of a unit of the

conventional, nanofood, and organic food products is given by:

UcU P

c c if the conventional food product is consumed

UnU V P

n n if the nanofood product is consumed

Uh U Ph h if the organic food product is consumed

(1)

where U denotes a base level of utility associated with the physical attributes of the product that

do not depend on the process through which the product is produced, and is common for all

consumers; V is a non-negative parameter capturing the consumer valuation of enhanced

attribute(s) enabled only by food nanotechnology; Pc, P

n, and hP are, respectively, the market

prices for the conventional, nanofood, and organic food products; c,h, and n are preference

parameters – utility discount or enhancement factors – associated with consuming the

8 Note that even when the enhanced attributes of the nanofood are not directly observable by consumers, as in the case of smart or active packaging, nanofood producers have an incentive to communicate this information to consumers. For instance, advertisements communicate drug advantages such as slow release or targeting of specific tissues both of which generate less side effects without disclosing the process that makes these advantages possible i.e., nanotechnology.

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conventional, organic, and nanofood product, respectively, capturing the intensity of consumer

preferences for the production technologies used to produce these products with c 0 and h 0 .

While, in most cases, organic production methods are perceived as less intrusive than

conventional production methods (due to reduced use of pesticides, chemicals, or hormones in

food production), the perceived relationship between food nanotechnology and conventional

production methods depends on the type of nanofood applications considered and/or how

consumers evaluate the risks and benefits of nanotechnology. Specifically, ‘nano-outside’

applications such as packaging with nanosensors can be perceived as less intrusive than ‘nano-

inside’ applications such as fortified nanojuices where nanoparticles are part of the product

(Siegrist et al. 2007). In addition, food nanotechnology could be perceived as less intrusive than

conventional technology when consumers consider nanotechnology applications that could

reduce pesticide and chemical use in food production or address non-point source pollution

problems. It could be perceived as more intrusive if consumers place more weight on the

potential risks of releasing nanoparticles into the environment.

To capture all plausible cases regarding consumer attitudes towards food nanotechnology,

our analysis will consider three different scenarios: Scenario A where consumers perceive food

nanotechnology as more intrusive than conventional production methods (i.e., n c ); Scenario

B when consumers perceive food nanotechnology as less intrusive than conventional production

methods (i.e., n c); and Scenario C where consumers are indifferent between food

nanotechnology and conventional production methods (i.e., n c). In all cases, the consumer

valuation of (and willingness-to-pay (WTP) for) a unit of conventional food, nanofood, and

organic food is given by U c , U V n and U h , respectively, and the consumer

surplus associated with the consumption of these products is measured by

CWm (WTPm Pm )d for m c,n,h.

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III. Market Outcomes under a No Labeling Regime

Under no labeling of food nanotechnology consumers can observe the enhanced attributes of the

nanofood (e.g., smart or active packaging) but they may be unaware and/or uncertain of the

production process that is used to produce them (i.e., nanotechnology). The preference

parameter for the non-labeled nanofood is given by (1 )nln n c where0 1(the

superscripts ‘ nl ’ and ‘ l’ are used to denote the no labeling and labeling regimes, henceforth).

Thus, in the absence of labeling, if consumers are unware of nanotechnology or its use in food

production they will assign a value of 0which implies that nln c ; i.e., consumers will

incorrectly assume that the enhanced attributes are produced using conventional technology and

they will view the nanofood as a different (improved, if they value these attributes) version of

the conventional food product. If consumers are familiar with nanotechnology and can infer with

certainty (e.g., from the enhanced attributes) that the product is a nanofood they will assign a

value of 1 which implies that nln n . All other cases where consumers are unsure about the

nature of the nanofood product under no labeling imply 0 1.

We first determine the market outcome under Scenario A where n c which also implies

that nnl c under a no labeling regime for 0 1. Let : ( ) ( )nl nl nln n n c nU U

nl nlnl c nn nl

P P V

n c

(see equation (1)) correspond to the consumer who receives the same

utility from the consumption of the nanofood and the conventional food product and is, thus,

indifferent between the two options. Similarly, the consumer with differentiating characteristic

: ( ) ( )nl nl nlc c c h cU U

nl nlnl h cc

P P

h c

is indifferent between the conventional food and its

organic counterpart. Consumers with differentiating characteristics [0, ]nln , ( , ]nl nl

n c

and ( ,1]nlc consume the nanofood, conventional, and organic food product, respectively

(Figure 1, panel (i)). When consumers are uniformly distributed along and their mass is

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normalized to unity, the market demands (and market shares) for the three food products under

coexistence of the three product forms are given by:

,nl nl

nl nl c nn n nl

P P VX

n c

1 ,nl nl

nl nl h ch c

h c P PX

h c

( )( ) ( )( ).

( )( )

nl nl nl nl nlnl nl nl h c c nc c n nl

n c P P h c P P VX

h c n c

It follows that the inverse demands under scenario A are:

( ) ( )

( ) ( )( ) ( )( )( )

( ) ( )

nl nl nl nl nln n c n

nl nl nl nl nlnl nl h n c

c c nl

nl nl nl nlh h c h

P X P V n c X

n c P h c P V h c n c XP X

h n

P X P h c h c X

(2)

Following the same approach (see Figure 1, panels (ii) and (iii)), the inverse demands

under scenario B (where n c which also implies that nln c under a no labeling regime for

0 1 ) can be derived as:

( ) ( )

( ) ( ) ( ) ( )( )

( )( )

( ) ( )

nl nl nl nl nlc c n c

nl nl nl nl nlnl nl h c n

n n nl nl

nl nl nl nl nl nlh h n h

P X P V c n X

c n P h n P h c P h c VP X

c n h n

P X P h n V h n X

(3)

while the relevant demands under scenario C (where n c which also implies that nln c

under a no labeling regime) are:

2

2

.

nl nl nl nlc c h c

nl nl nl nln n h n

nl nl nl nlh h c h

P X P h c X

P X P V h c X

P X P h c h c X

(4)

The equilibrium quantities and prices for the conventional, nanofood, and organic food

products are derived by solving the suppliers’ profit maximization problems given by:

1

2

3

( ( ) ) , . . ( ) ( , )

( ( ) ) , . . ( ) ( , )

( ( ) ) , . . ( ) ( , )

i

k

j

nl nl nl nl nl nl nlc c c c i c c h n

x

nl nl nl nl nl nl nl nln n n n k n n h c

x

nl nl nl nl nl nl nlh h h h j h h c n

x

Max P X C x s t P X g P P



(5)

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where (.) (.)P g is given by equation (2) under scenario A, equation (3) under scenario B, and

equation (4) under scenario C; ix , kx and jx are the quantities supplied by firms i, k and j in the

conventional food, nanofood, and organic food supply sector, respectively; and , , nlc nC C and hC

are unit costs of producing the conventional, nanofood, and organic food products in the absence

of nanofood labels, respectively. The first order conditions of the profit maximization problems

and the resulting market equilibrium quantities and prices for the food products under the three

scenarios are presented in Appendix A.2. Finally, the welfare of consumers and the profits of

suppliers of the nanofood, conventional, and organic food products can be obtained as follows:

CWnnl Un

nl ( )d( ) (U V Pnnl* nnl )d( )

0

Xnnl*

0

nnl

; nnl (Pn

nl* Cnnl )Xn

nl*

CWcnl U

cnl ( )d( ) (U P

cnl* c )d( )

Xnnl*

Xnnl*Xc

nl*

nnl

cnl

; cnl (P

cnl* C

c)X

cnl*

CWhnl Uh

nl ( )d( ) (U Phnl* h )d( )

Xnnl*Xc

nl*

1

cnl

1

; hnl (Ph

nl* Ch )Xhnl*

(6)

IV. Market and Welfare Effects of Nanofood Labeling

The introduction of nanofood labels can have three major effects: a cost effect, a certainty effect,

and a stigma effect. The cost effect refers to increased costs in the nanofood supply channel due

to the labeling regime. It should be noted that, for simplicity, we assume that the labeling

regulation for nanofoods affects the cost structure of the nanofood sector only.9 Moreover,

related administrative costs of the regulation are assumed to be fixed and borne by nanofood

producers. The certainty effect of nanofood labeling refers to the elimination of consumer

uncertainty that might exist under no labeling regarding the true nature of the nanofood.10

9 There is currently no scientific consensus on the environmental impacts of food nanotechnology. Hence, it is uncertain whether the production of nanofoods contaminates other crops or the environment and therefore whether the conventional and/or organic substitute have to incur segregation or identity preservation (SIP) costs. Also, there has currently been no discussion on SIP costs regarding nanofoods, thus, the assumption of no spillover effects is a plausible one. 10 For simplicity we assume that consumers trust labels. Thus, in the absence of labeling, where the utility discount (enhancement) factor of the non-labeled nanofood is nnl n (1 )c where 0 1, the certainty effect of labeling results in 1. Note that the qualitative nature of our results does not change if consumers do not trust labels completely; in such a case, the certainty effect will be smaller.

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Finally, nanofood labels could have a stigma effect on nanofoods if consumers view labeling as

a warning that the consumption of the product might involve new risks. The stigma effect causes

an increase in consumer aversion to nanofoods under labeling. As noted earlier, the explicit

consideration and modeling of the stigma effect is a key differentiating attribute of our study and

a contribution to the general literature on the economics of labels.

The certainty and stigma effects (preference effect, hereafter) are captured by ln , the

preference parameter associated with the consumption of the nanofood under a labeling regime.

Specifically, the parameter ln is given by nl n where 0 is the utility discount

associated with the consumption of the (labeled) nanofood due to the stigma effect of labeling.

A change in consumer attitudes towards the use of food nanotechnology due to labeling

alters the perceived quality differences between nanofood products and their conventional and

organic counterparts. As will become evident in the analysis that follows, the perceived quality

difference between the nanofood and the conventional product increases under labeling regardless

of whether labeling causes consumers to become more or less averse to food nanotechnology. On

the other hand, the perceived difference in quality between the organic product and the nanofood

is greater (smaller) when labeling causes consumers to become more (less) averse to nanofoods.

In addition, when the introduction of labeling causes consumers to become more averse to

nanofoods, the preference effect reinforces the cost effect while if it causes consumers to become

less averse, the preference effect counters and moderates the economic impact of the cost effect.

Table 1 summarizes all plausible scenarios and outcomes examined along with our

findings on the market and welfare impacts of nanofood labeling. These findings demonstrate

that the consumer attitudes towards nanofoods, the attitudes before and after the introduction of

labeling, matter; they play a key role in determining the economic impacts of the labeling

regime and should not be ignored. In this context, the explicit consideration of the impact of the

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labeling policy on consumer preferences, as done in this study, is essential in understanding the

market and welfare effects of this policy mechanism.

Table 1. Labeling Effects No Labeling Labeling Market and Welfare Effects

Scenario A: Consumers are more averse to nanofoods than conventional

foods ( n c nnl cfor 0 1 )

Aversion to nanofoods increases or remains the same

(i.e., nl nnl nl c )

Market Effects:

n n c c h hP X P X P X

Welfare Effects:

CWn c h

Scenario B: Consumers are less averse to nanofoods than conventional

foods ( nln c n c for 0 1 )

Aversion to nanofoods

increases (i.e., nl nnl nl c, ln c or nl c )

a. Cost effect is dominant b. Preference effect is

dominant

Aversion to nanofoods

decreases (i.e., nl nnl

nl c ) c. Cost effect is dominant d. Preference effect is

dominant

a. Same as under scenario A b. Market Effects:


Welfare Effects CWn c hor or

c. Same as under scenario A d. Market Effects:


Welfare Effects: CWn c hor or

Scenario C: Consumers are indifferent between nanofoods and conventional foods

( n c nnl c)

Aversion to nanofoods remains the same or increases

(i.e., nl nnl nl c )

Same as under scenario A

The consumer utility and supplier profit maximization problems under labeling have the

same setup as in equations (1) and (5). Following the approach described in the previous section,

we derive the market equilibrium quantities and prices under labeling and under scenarios A, B

and C which are identical to those under no labeling with the superscript ‘ nl ’ replaced by ‘ l’

(see Appendix A.2).

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Scenario A ( n c)

Under scenario A where consumers are more averse to food nanotechnology than conventional

technology, the introduction of nanofood labels increases, in most cases, aversion to food

nanotechnology compared to a no labeling regime, i.e., nl nnl . This occurs even when the

stigma effect of labeling is insignificant ( ) as under labeling consumers know with

certainty that the product is their least preferred (under this scenario) nanofood. The only

exception is the special case where consumer aversion to food nanotechnology remains

unchanged under labeling ( l nln n ); this occurs when 1 under no labeling and labeling has

no stigma effect ( 0 ).

The changes in the nanofood price and quantity due to the labeling regulation under

scenario A are given by:11

Pnl P

nl P

nnl

n(P

cl V )C

nl

1n

n(P

cnl V )C

nnl

1n

n(P

cl P

cnl )C

nl C

nnl

1n

(7)

Xnl Xn

l Xnnl

1

1n

Pcl V Cn

l

nl c

Pcnl V Cn

nl

nnl c

(8)

where n is a conjectural variations elasticity capturing the market power of nanofood suppliers

(see Appendix A.2).

Let l l nln n nC C C be the labeling costs incurred by nanofood suppliers ( 0)l

nC and

l l nlc c cP P P be the change in the conventional food price due to the labeling policy. As will

become evident in the analysis that follows, l ln cC P since the change in the conventional

food price is indirectly caused by the increase in the production cost of the nanofood. It follows

that, (

(

) ( )

1 ))(

l l nl nlc n c n

ln

n nl P V C P V C

n cX

0(1 ( ))

l lc n

nln

P

n c

C

and 0,1

nl ln c

nn

l C PP

indicating a decrease in the equilibrium quantity of the nanofood and an increase in its price due

11 See Appendix A.2 for the derivation of Xn

nl and Xn

l under all scenarios.

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to the cost and preference effects of labeling. Moreover, it is straightforward to show that

0,ln

ln

X

C

0,

ln

n

X

Pnl

Cnl 0, and 0

ln

n

P

(see Appendix A.3), indicating that the greater

is the increase in the production cost and the lower is the market power of nanofood suppliers,

the greater is the reduction in the nanofood quantity and the increase in the nanofood price. The

price of the nanofood is unaffected by the preference effect (P

nl

nl 0) while the more averse

consumers are to the use of food nanotechnology, the larger is the reduction in the consumption

of the nanofood ( Xn

l

nl 0) . Moreover, since ln n and (1 ) ,nln n c it follows that

(1 )( ) ,l nln n n c indicating that the more informed are consumers about the presence

of food nanotechnology under a no labeling regime (i.e., 1) and/or the smaller is the stigma

effect of nanofood labels (i.e., 0 ), the smaller is the impact of nanofood labeling on

nanofood consumption.

Figure 2 illustrates the direct impact of the labeling regulation on the nanofood market.

With the imposition of nanofood labels, nanofood suppliers incur an increase in production costs

(from Cn

nl to Cn

l ) which, in turn, increase consumer prices from Pn

nl* to Pn

l and reduce the

equilibrium nanofood consumption from Xn

nl* to X1(see Figure 2, panel (i)). At the same time,

consumers’ increased aversion to nanofoods after labeling results in an increase in the slope of

the demand curve from nnl c to nl c where nl nnl , which further reduces the nanofood

quantity (Figure 2, panel (ii)).12 The combined direct effect of labeling on the nanofood sector is

illustrated in Figure 2, panel (iii).

Figure 3 depicts the effects of nanofood labeling on all relevant food markets under

scenario A when consumers become more averse to nanofoods under labeling (see also Table 1).

12 Note that given constant marginal costs and a linear demand curve, the change in the slope of the demand curve does not influence the price if the intercept of the demand curve remains the same.

13

The increase in the nanofood price, as shown in Figure 3, panel (i), triggers an increase in the

demand for the conventional food, resulting in an increase in the quantity and price of the

conventional food product (Figure 3, panel (ii)).13 The increase in the price of the conventional

food, in turn, results in a rightward shift in the market demand for the organic food causing the

equilibrium quantity and price of the organic product to also increase (Figure 3, panel (iii)). In

addition to increasing the demand for its organic counterpart, the higher price of the conventional

product increases also the demand for the nanofood, bolstering the impact of nanofood labeling

on the prices of these products and lessening its impact on their equilibrium quantities.14

Given that the prices and quantities of the conventional and organic food products

increase, suppliers of these products gain when nanofood labeling is mandated (Figure 3, panel

(ii), (iii)). On the contrary, the increase in costs exceeds the (subsequent) increase in the

nanofood price which (along with the decrease in the equilibrium quantity) results in reduced

profits for nanofood suppliers (Figure 3, panel (i)).15 On the consumer side, the increase in the

prices of all food products and the increased aversion towards food nanotechnology reduce

consumer utility (and, thus, welfare) from the consumption of these products (Figure 3, panel

(iv)). Consumers who switch their consumption from the nanofood to the conventional food are

those with moderate aversion towards interventions in the production process, ( n

l , n

nl ).

Among those who continue to consume the nanofood, those more averse to interventions in the

production process experience greater welfare losses. In addition, the greater are the labeling

costs and the higher is consumer aversion towards food nanotechnology under a labeling system,

the greater is the decrease in consumer welfare and nanofood supplier profits, and the greater is

the increase in the conventional and organic supplier profits.

13 These interactions are also shown through the FOCs in Appendix A.2. 14 Note that the increase in the quantity of the nanofood due to the increase in the conventional food price is not sufficient to offset the initial direct effects of labeling, resulting in an overall decrease in the nanofood quantity after the introduction of the labeling regime. 15 See also Appendix A.4 for simulation results and graphical representations of the effect of nanofood labels on the profits of nanofood suppliers.

14

The above analysis and results also hold when the nanofood is driven out of the market

due to the introduction of labeling. This special case emerges when the increase in the nanofood

price due to labeling results in Pnl Pc

l V . In this case, demands for the conventional and

organic food substitutes further increase and so do their prices. Profits are greater for

conventional and organic food suppliers and lower for nanofood suppliers. Consumer welfare is

reduced due to the increase in food prices, the elimination of the nanofood option and loss of the

enhanced benefits that it conferred.

Scenario B ( n c )

Under scenario B where consumers are less averse to food nanotechnology than conventional

technology, the introduction of nanofood labels can increase or decrease aversion to food

nanotechnology compared to a no labeling regime. Aversion to nanofoods can increase

( l nln n ) when the stigma effect of labeling is relatively large. When labeling increases

consumer aversion to nanofoods, consumers could either remain less averse to nanofoods than

conventional foods ( l nl ln n n c ) or they could become more averse to nanofoods than

conventional foods under labeling ( l nl ln n n c ); both cases are examined below.

Aversion to nanofoods can decrease ( l nln n nl c ) when the stigma effect is not significant

( ) as under labeling consumers know with certainty that the product is their most preferred

(under this scenario) nanofood. In the special case where 1 under no labeling and when the

introduction of labeling has no stigma effect ( 0 ), consumer aversion to nanofood will not

change ( l nln n ).

When the stigma effect is significant, and as a result aversion to food nanotechnology

increases under labeling, the overall changes in the equilibrium price and quantity of the

nanofood due to nanofood labeling are given by equations (9) and (10) if ,ln c

15

[ ( ) ( ( )( ) ( ) ) ]

1 1 )( )(

l l nl nln c n n

n

nl nl nll h c

nn

nhP V C c n P h cn P V h c CP

h c

(9)

Xnl Xn

l Xnnl

Pcl V C

nl

(1n )(nl c)

(c nnl )Phnl (h nnl )P

cnl (h c)(V C

nnl )

(1n )(c nnl )(h nnl ) (10)

and by equations (11) and (12) if nl c ,

[( ) ( ) ( ) ( ) ] ( )(

(1 )( )

)l l nl nl l l nl nl l nll n h h c c n n

nn

c n P c n P h n P h n P h c C CP

h c

(11)

( ) ( ) ( )(

(1 )( )( )

( ) ( ) ( )(.

(1 ( (

)

) ) )

)l l l l ll h c nn l l

n

nl nl nl nl nlh c n

nl nln

c n P h n P h c V CX

c n h n

c n P h n P h c V C

c n h n

(12)

It is important to note that when nanofood labels increase aversion to nanofoods under this

scenario ( l nln n ), the cost and preference effects of labeling work in opposite directions. That

is, while the nanofood price increases under the cost effect, it decreases under the preference

effect, i.e., Pn

l

Cn

l 0 and 0

l

n

l

P

n

(see Figure 4, panels (i) and (ii)).16 It follows that the

qualitative results under scenario B are the same as under scenario A if the cost effect of labeling

dominates the preference effect (see Table 1).17 That is, when the cost effect dominates the

preference effect, the nanofood price increases, the quantity of the nanofood decreases,

consumers and suppliers of the nanofood lose, and suppliers of the conventional and organic

food gain (Figure 5, panels (i-iii)). The key difference between the two scenarios lies, however,

on the distributional effects of the labeling regulation on consumers; consumers who lose the

most under scenario B are those with relatively higher aversion to interventions in the

production process while consumers losing under scenario A are those with relatively lower

aversion to interventions in the production process (Figure 5, panel (iv)).

16 See Appendix A.3, scenario B. 17 Note that under scenario A the preference and cost effects work in the same direction; regardless of which effect dominates, the nanofood price increases.

16

When the preference effect dominates the cost effect, the qualitative results differ in that

the nanofood price is reduced (along with a decrease in nanofood consumption). The increase in

consumer aversion to the use of food nanotechnology narrows the perceived quality gap

between the conventional and nanofood products and widens the perceived quality gap between

the organic and nanofood products. This change in the relative quality difference is reflected in

the change in the elasticity of the demand of the conventional and organic food products. In

particular, the demand becomes flatter for the conventional food and steeper for the organic

food, as depicted in panels (ii) and (iii) of Figure 6 for nl c and Figure 7 for nl c .

The increased aversion to nanofoods triggers, then, an increase in the equilibrium

quantities of the conventional and organic food substitutes, a reduction in the prices of the

nanofood and conventional products, and an increase in the price of their organic counterpart.

As a result, profits are greater for organic food suppliers but ambiguous for conventional food

suppliers; a labeling policy will benefit conventional food suppliers if the benefits from the

increased output exceed the losses from the reduced prices and vice versa. The impact of

labeling on consumers is, in this case, ambiguous with winners being those with relatively low

aversion to interventions in the production process. More specifically, if consumers become

more averse to nanofoods under a labeling regime (but are still less averse to nanofoods than

conventional foods under labeling ( nl ln n c )), potential winners are existing conventional

food consumers (due to the reduction in conventional food price), those who switch their

consumption from the nanofood to the conventional food, and some existing nanofood

consumers who have relatively low aversion to interventions in the production process (i.e.,

0); while all remaining groups of consumers lose (Figures 6, panel (iv)). If, on the other

hand, consumers become more averse to nanofoods than conventional foods under labeling (

nl ln c n ), potential winners are the consumers who switch their consumption from

conventional food substitutes to nanofoods (due to a greater decrease in the nanofood price as

17

compared to a decrease in the conventional food price and the enhanced attributes enabled by

food nanotechnology) and/or those who continue consuming the nanofood but have relatively

lower aversion to interventions in the production process (Figure 7, panel (iv)). Having low

aversion to interventions in the production process, these consumers are only minimally affected

by the introduction of the labeling regime.

If the stigma effect is not significant, then under scenario B, nanofood labels decrease

aversion to nanofoods ( l nln n ) since consumers become certain of the nature of their preferred

nanofood and consumer utility from the consumption of the nanofood increases. This leads to

some consumers finding it optimal to switch their consumption from the conventional product to

the nanofood. Demand for the nanofood, thus, increases and so does its price. While the

nanofood price increase is further bolstered by the increased costs due to the labeling regime, the

total effect on the equilibrium quantity is determined by the relative magnitude of the increases

in the demand and labeling costs (that increase and reduce the equilibrium quantity,

respectively).

Analytically, the changes in prices and quantities for the nanofood in this case are given in

equations (11) and (12). Expression (11) is greater than zero (i.e., Pn

l 0)18 when nl nnl

indicating an increase in nanofood price when the labeling policy is introduced. On the other

hand, the expression in equation (12) shows that the direction of quantity change is ambiguous.

This is, as argued earlier, due to the fact that the effect of labeling on nanofood consumption

depends on the relative magnitude of the cost and preference effects of labeling. Since Pn

l

Cn

l 0

andXn

l

Cn

l 0,19 the nanofood price increases and the quantity decreases when the labeling cost

18 ( )( ) ( )

0(1 )( )

nl l nl nll n h c n

nn

n n P P h c CP

h c

19 See Appendix A.3, scenario B.

18

becomes higher. In addition, since Pn

l

n

0, Xn

l

n

0 (or 0) if Xnl 0 (or 0), the

greater is the market power of nanofood suppliers, the greater is the increase in the nanofood

price and the smaller (greater) is the increase (decrease) in the consumption of the nanofood.

Panels (iii) and (iv) of Figure 8 illustrate the combined direct effect of labeling on the nanofood

sector under these conditions.

When the cost effect is dominant, the impacts of nanofood labeling on the market

equilibrium of the nanofood, conventional, and organic food products as well as supplier profits

and consumer welfare are qualitatively the same as under the case where the introduction of

labels increases aversion to nanofoods ( l nln n ) (see Table 1). That is, equilibrium prices

increase in all food sectors, equilibrium quantities are lower for the nanofood and higher for the

conventional and organic food, consumer welfare decreases, and profits are lower for nanofood

suppliers and higher for non-nanofood suppliers (Figure 9). This occurs because the increased

production costs result in an increase in the nanofood price and a decrease in nanofood

consumption regardless of the consumer attitudes towards nanofoods in the absence of labeling.

When the preference effect is dominant, due to stronger consumer preference for the

nanofood, more consumers opt for the nanofood despite its higher price, and nanofood suppliers

enjoy profit gains (Figure 10, panel (i)). The demand for the organic food product falls, reducing

its price accordingly. The conventional sector experiences a decrease in quantity and an increase

in price (Figure 10, panels (ii) and (iii)). Therefore, profits are lower for organic food suppliers

but ambiguous for conventional food suppliers. The impact of nanofood labeling on consumer

welfare is asymmetric in this case: while consumers who continue to consume the conventional

food as well as those who switch their consumption from the conventional food to the nanofood

incur welfare losses due to the increase in conventional food price (with the latter losing less

because of the benefits they obtained from the nanofood’s enhanced attributes), consumers who

19

continue to consume the organic food and those who switch their consumption from the organic

product to the nanofood benefit from the decrease in organic food price (with the latter gaining

more). Nanofood consumers experience gains (losses) if their aversion towards interventions in

the production process is relatively high (low) (Figure 10, panel (iv)). When the preference

effect is dominant, the findings for this case are opposite to those under scenario B when

consumers become more averse to nanotechnology under labeling (see Table 1).

With the increase in nanofood price being greater than the increase in conventional food

price,20 it is possible that the nanofood is driven out of the market should the increase in

consumer utility from consuming a unit of the nanofood not suffice to compensate for the

increase in nanofood price. However, for the same reason (i.e., l l

n cP P ), the conventional

food product cannot be driven out of the market after nanofood labels are introduced even if

consumers perceived the use of food nanotechnology as far more beneficial than conventional

production methods.21

Scenario C ( n c )

Under scenario C where consumers are indifferent between food nanotechnology and

conventional technology, the introduction of nanofood labels can either leave consumer

preferences towards food nanotechnology unaffected ( l nln n ) – which occurs when the stigma

effect of labeling is insignificant ( 0 ) or increase their aversion to food nanotechnology (

l nln n ) compared to a no labeling regime – which emerges when the stigma effect is positive.

20

( ) ( )

1 1 1

l nl ll lc n c c n c c n

c n

c c c

P V C P V C PP P

.

21 Consider panel (iv) of Figure 10. For conventional foods to be driven out of the market after labeling, the utility curve of the conventional food must lie below the utility curve of the nanofood for all values of . This implies that

at 0, l ln cU V P U P l l

n cP V P . However, the coexistence of the nanofood, conventional, and organic

food products under no labeling implies that nl nln cP V P nl nl

n cP V P . These two inequalities imply that,

for this case to emerge, the increase in conventional food price must be greater than the increase in nanofood price

(i.e., l nl l nln n c cP P P P ), which cannot arise since .l l

c nP P

20

The changes in quantities and prices of nanofoods due to the labeling regulation under

scenario C are given by equations (15) and (16) if l nln n c ,

( ) ( ) (

1 1 1

)l l nl nl l ln n n n n n

n

nl nll h h h h

nn

n

nP V C P V C P CP

P C

(15)

(

2(1 )( ) 2(1 )( ) 2

) ( )

(1 )( )

l l nl nl l nll h n h n h nn

n

l ln

n

h

n

nP V C P V C P CX

h c

P

h c h c

C

(16)

and equations (17) and (18) if l nln n c .

( ) ( ) (

1 1 1

)l l nl nl l ln n n n n n

n

nl nll c h c h

nn

n

nP V C P V C P CP

P C

(17)

Xnl

Pcl V C

nl

(nl c)(1n )

Phnl V C

nnl

2(h c)(1n ) (18)

When consumers remain indifferent between food nanotechnology and conventional food

technology under labeling ( l nln n c ), the nanofood price increases and the nanofood quantity

decreases since 0lnP and 0l

nX .22 Under this case, the changes in the market of the

nanofood product are solely due to increased production cost due to labeling. Moreover, since

Pn

l

Cn

l 0,

Xn

l

Cnl 0,

Pn

l

n

0,

Xn

l

n

0, the higher is the production cost of the nanofood

and the smaller is the market power of the nanofood suppliers, the greater is the increase in the

nanofood price and the decrease in the nanofood quantity.

Figure 11 illustrates the impact of labeling under scenario C when l nln n c . As

nanofood production costs increase, the price of the nanofood increases, reducing its quantity.

The increase in the nanofood price boosts the demands for the organic and conventional food,

causing an increase in the prices of these two goods. Subsequently, profits are higher for

conventional and organic food suppliers and lower for nanofood suppliers. Consumer welfare is

smaller as a result of higher food prices.

22 See Appendix A.3, scenario C.

21

Finally, when the stigma effect is positive under scenario C, the labeling policy causes

consumers to become more averse to food nanotechnology than conventional food technology (

l nln n c ). Compared to the case where consumers remain indifferent between the nanofood

and the conventional food under labeling, when nl c the nanofood quantity is further reduced,

resulting in greater losses for nanofood suppliers. Conventional and organic food suppliers gain in

this case as demands for their products increase. Figure 12 depicts the overall effects of nanofood

labeling on the market equilibrium, producer profits and consumer welfare under this case.

V. Conclusions

A model of heterogeneous consumers and imperfectly competitive suppliers was developed to

analyze the effects of nanofood labeling on (a) the markets of nanofood, conventional and

organic food products, and (b) the welfare of the interest groups involved (i.e., consumers and

suppliers of these products). The analysis considers different scenarios regarding consumer

attitudes towards the use of nanotechnology in food production (i.e., whether consumers are

more averse, less averse, or indifferent to the use of food nanotechnology relative to

conventional food technology) and potential change in these attitudes due to the implementation

of the labeling policy. While empirically relevant (and well-documented by consumer

preference studies), the economic ramifications of a labeling policy’s impact on consumer

preferences have largely been ignored by the relevant literature.

Our analysis shows that the consumer attitudes towards nanofoods, the attitudes before and

after the introduction of labeling, play a key role in determining the economic impacts of the

labeling regime and cannot be a matter of indifference. In this context, the explicit consideration

of the impact of the labeling policy on consumer preferences, as done in this study, is essential

in understanding the market and welfare effects of this policy mechanism.

Regarding the labeling policy, it affects the nanofood sector by raising production costs

(cost effect), enhancing consumer awareness of the true nature of the products (certainty effect),

22

and/or increasing consumer aversion towards the use of nanotechnology in food production

(stigma effect). In this context, nanofood labeling can change the perceived quality differences

between nanofoods and their conventional and organic counterparts, with such changes being

more salient when the stigma effect is large, when consumers have low awareness of food

nanotechnology in the absence of labeling, and/or when competition among food suppliers is

more intense. Our analytical findings suggest that the presence of a stigma effect of nanofood

labels and labeling costs are likely to cause a reduction in nanofood consumption and an

increase in nanofood price while the certainty effect can have either a negative or positive

impact on the equilibrium nanofood quantity and price. In particular, when under the certainty

effect consumers become more certain that a product is their less desirable (preferred) product,

equilibrium quantity of the nanofood decreases (increases).

Under the above effects, profits are lower for nanofood suppliers but higher for

conventional and organic food suppliers when consumers are more averse to food

nanotechnology than conventional food production methods prior to the introduction of labeling

and become even more averse under labeling. When consumers are less averse to food

nanotechnology than to conventional technology in the absence of labeling and become more

averse under labeling, the effects of nanofood labels are the same for nanofood and organic

suppliers but ambiguous for conventional suppliers and consumers. Conventional food suppliers

may earn higher (lower) profits if the increase in quantity for their products is greater (smaller)

than the reduction in price. Interestingly, certain groups of consumers can realize welfare gains

even when nanofood labels create a stigma effect. Potential gainers are those who are relatively

less averse to interventions in the production process and are thus minimally affected by the

information provided by the labeling policy while benefiting from reduced food prices. They are

most likely nanofood or conventional food consumers.

23

If consumers are less averse to food nanotechnology than conventional technology under

no labeling and remain less averse under labeling, nanofood labeling increases the profits of

nanofood suppliers and reduces the profits of conventional and organic food suppliers. Similar

to the previous cases, the introduction of labels creates winners and losers among consumers.

Potential winners include organic food consumers and some nanofood consumers with relatively

high levels of aversion to interventions in the production process while potential losers include

conventional food consumers and the remaining nanofood consumers with relatively low levels

of aversion to interventions in the production process.

Beside consumer attitudes towards nanofoods, the impacts of a nanofood labeling policy

are shown to depend on the degree of market power of food suppliers, the size of labeling costs

as well as the degree of consumer awareness of the presence of nanofoods before the labeling

policy takes place. Specifically, the more intense the competition in the nanofood industry, the

greater the labeling costs, and/or the less informed are consumers about food nanotechnology,

the greater is the impact of a labeling regime on consumer welfare and supplier profits.

In addition to explicitly considering the potential impact of the labeling policy on

consumer preferences and providing insights on the market and welfare effects of nanofood

labeling under the different, empirically relevant cases considered in our study, the

methodological framework of analysis developed here can provide the theoretical grounding and

a basis for empirical studies of this important food policy instrument. Empirically determining

the consumer attitudes towards certain nanofoods and different kinds of labels as well as the

relevance and significance of the stigma effect to labeling of various applications of food

nanotechnology can be critical to the design of socially desirable nanofood labeling regimes.

These issues are the focus of future research.

24

List of Figures

Consu

mer

Uti

lity

Differentiating consumer characteristic α

Panel (ii): Scenario B ( n c ) Panel (i): Scenario A ( n c )


Co

nsu

mer

Uti

lity

h

1 0

nl

cU P

nl

hU P

nl

c

nl

hX nl

nX

nln

nl

nU V P

nl

n

nl

cX

c

h

1 0

nl

cU P

nl

hU P

nl

c

nl

hX nl

nX

nln

nl

nU V P

nl

n

nl

cX

c

Panel (iii): Scenario C ( )


Consu

mer

Uti

lity

h

1 0

Figure 1. Consumer decisions and market shares under no labeling under scenarios A, B,

and C.

25

Quantity

Price

Figure 2. Direct effects of the labeling regime on the nanofood sector under Scenario A

when consumers become more averse to food nanotechnology under labeling (l nln n ).

Panel (i): Cost effect on the nanofood Panel (ii): Preference effect on the nanofood

Quantity

Price

Panel (iii): Combined direct effects on the nanofood

Price

Quantity

*nl

nP

nl

nMR nl

nMR

l

nMR

nl

nMR

l

nMR

26

nl

hX

nl

nX

nl

n

ln

Consumer

Welfare Loss


Panel (iv): Consumer welfare effects

l

c

l

cX

c

h

1 0

nl

cU P

nl

hU P

nl

c

nln

nl

nU V P

nl

cX

l

cU P

l

hU P

l

nU V P

l

n

l

hX

l

nX

nln c

*nl

nP

nl

nD

nl

cP V

nl

nC

*nl

nX

ln c

l

nD

*l

nP

l

nC

*l

nX

l

cP V

Panel (i): Nanofood

Profit Loss

l

cD

nl

cD

nl

nC

*nl

nX

*l

nP

*l

nX

l

cP V

Panel (ii): Conventional food

*nl

cP

cC

*l

cX

*l

cP

*nl

cX

( ( ))l l l

h n

l

n P h c Pc

h n

( ( ))nl nl nl

h n

nl

n P h c Pc

h n

Profit Gain

( )( )nl

nl

h c n c

h n

h c

*nl

hP

nl

hD

nl

cP h c

*l

hX

h c

l

hD

*l

hP

Panel (iii): Organic food

Profit Gain

hC

*nl

hX

l

cP h c

Figure 3. Overall effects of the labeling regime on market equilibrium and welfare

under Scenario A when consumers become more averse to food nanotechnology under

labeling (l nln n ).

Price

Quantity

Price

Quantity

Price

Quantity

( )( )l

l

h c n c

h n

nl

nMR

l

nMR l

cMR nl

cMR

l

hMR nl

hMR

27

Quantity

Price

Figure 4. Combined direct effects of the labeling regime on the nanofood sector under

Scenario B when consumers become more averse to food nanotechnology under labeling

(l nln n ).


( )( )nl nlc n h n

h c

( ) ( ) ( )nl nl nl nl

h cc n P h n P h c V

h c

1P

l

nC

*nl

nP

nl

nD

Price

nl

nC

*nl

nX 1

X

Quantity

2P

( ) ( ) ( )l l l l


h c

Quantity

Price

Quantity

Price

( ) ( ) ( )l l l l


h c

( ) ( ) ( )l l l l


h c

Panel (iii): Combined direct effects of labeling

on the nanofood (Cost effect is dominant)

Panel (iv): Combined direct effects of

labeling on the nanofood (Preference effect

is dominant)

l

nC

*nl

nP

l

nC

*l

nP

nl

nMR

l

nMR

nl

nMR

l

nMR nl

nMR

l

nMR

nl

nMR

28

( ) ( ) ( )l l l l


h c

( ) ( ) ( )nl nl nl nl


h c

Figure 5: Overall effects of the labeling regime on market equilibrium and welfare

under Scenario B when consumers become more averse to food nanotechnology under

labeling (nl ln n c ) and the cost effect dominates the preference effect.

( )( )l lc n h n

h c

*l

nP

*nl

nP

( )( )nl nlc n h n

h c

Quantity

Price

l

nC nl

nC

*l

nX *nl

nX

l

nD

nl

nD

Profit Loss

Quantity

cC

*l

cP

l

nP V

Profit Gain

nlc n

lc n

Price

*nl

cP

nl

nP V

l

cD *nl

cX *l

cX

Profit Gain

Quantity

Price

lh n

nlh n c

h

Consumer

Welfare Loss


1 0

Consumer

utility

l

hD nl

hD

nl

nMR

l

nMR l

cMR nl

cMR

l

hMR nl

hMR


Panel (i): Nanofood Panel (ii): Conventional food


nl

cD

29

( ) ( ) ( )l l l l


h c

( ) ( ) ( )nl nl nl nl


h c



labeling (nl ln n c ) and the preference effect dominates the cost effect.

( )( )l lc n h n

h c

*l

nP

*nl

nP ( )( )nl nlc n h n

h c

Quantity

Price

l

nC nl

nC

*l

nX *nl

nX

l

nD

nl

nD

Profit Loss

Quantity

cC

*nl

cP

nl

nP V

Ambiguous

Change in Profit

nlc n lc n

Price

*l

cP

l

nP V

l

cD nl

cD *nl

cX *l

cX

Profit Gain

Quantity

Price

lh n

nlh n c

h


1 0

Consumer

Utility

l

hD nl

hD

nl

nMR

l

nMR l

cMR nl

cMR

l

hMR nl

hMR




Consumer

Welfare Loss

Consumer

Welfare Gain

30

l

cP V

( ) ( ) ( )nl nl nl nl


h c



labeling (nl ln c n ) and the preference effect dominates the cost effect.

ln c

*l

nP

*nl

nP

( )( )nl nlc n h n

h c

Quantity

Price

l

nC nl

nC

*l

nX *nl

nX

l

nD nl

nD

Profit Loss

Quantity

cC

*nl

cP

nl

nP V

Ambiguous

Change in Profit

nlc n ( )( )l

l

n c h c

h n

Price

*l

cP

( ) ( )l l l

h n

l

n c P h c P

h n

l

cD nl

cD *nl

cX *l

cX

Profit Gain

Quantity

Price

h c

nlh n c

h


1 0

Consumer

Utility

l

hD nl

hD

nl

nMR

l

nMR l

cMR nl

cMR

l

hMR nl

hMR




Consumer

Welfare Loss

Consumer

Welfare Gain

31

Price

Quantity

Price

Figure 8: Combined direct effects of the labeling regime on the nanofood sector under

Scenario B when consumers become less averse to food nanotechnology under labeling

(l nln n ).


Panel (iii): Combined direct effects of labeling on

the nanofood (Cost effect is dominant)

Panel (iv): Combined direct effects of

labeling on the nanofood (Preference effect

is dominant)

nl

nMR

l

nMR

nl

nMR

l

nMR nl

nMR

l

nMR

nl

nMR

32

Figure 9: Overall effects of the labeling regime on market equilibrium and welfare under


(l nln n ) and the cost effect dominates the preference effect.

Price

( )( )nl nlc n h n

h c

( ) ( ) ( )l l l l


h c

*l

nP *nl

nP

*nl

nX

*l

nX

nl

nC

l

nC

Quantity

Profit Loss

Price

Quantity

Price

Quantity

nlc n

nl

nP V

*nl

cP

*l

cX

cC

Profit Gain

l l

nP V h n

*l

hP

*l

hX

hC

nlh n

*nl

hP

*nl

hX

nl nl

nP V h n

lh n

Profit Gain

nl

nU V P

nl

cU P

l

c nl

n

0 1

l

hU P

nl

hU P

Consumer Utility


Consumer Welfare Loss

l

hX

l

cX nl

cX

nl

hX

h

c

nln

( )( )l lc n h n

h c

( ) ( ) ( )nl nl nl nl


h c

l

nD

nl

nD

l

nP V

*l

cP

*nl

cX

l

cD nl

cD

nl

hD l

hD nl

nX

l

cU P

l

nU V P

l

n

l

nX

nl

c

ln

lc n

nl

nMR

l

nMR l

cMR nl

cMR

l

hMR nl

hMR




33

Figure 10: Overall effects of the labeling regime on market equilibrium and welfare under


(l nln n ) and the preference effect dominates the cost effect.

Price

( )( )nl nlc n h n

h c

( ) ( ) ( )l l l l


h c

*l

nP *nl

nP

*l

nX *nl

nX

nl

nC

l

nC

Quantity

Profit Gain

Price

Quantity

Price

Quantity

nlc n

nl

nP V

*nl

cP

*nl

cX

cC

Ambiguous Change in

Profit

Profit Loss

nl nl

nP V h n

*nl

hP

*nl

hX

hC

nlh n

*l

hP

*l

hX

l l

nP V h n

lh n

Profit Loss

nl

nU V P

nl

cU P

nl

c nl

n 0 1

l

hU P nl

hU P

Consumer Utility


Consumer

Welfare Loss Consumer

Welfare Gain

l

hX

l

cX

nl

cX

nl

hX

h

c

nln

( )( )l lc n h n

h c

( ) ( ) ( )nl nl nl nl


h c

l

nD nl

nD

l

nP V

*l

cP

*l

cX

l

cD nl

cD

l

hD nl

hD nl

nX

l

cU P l

nU V P

l

n

l

nX

l

c

ln

lc n

l

nMR nl

nMR l

cMR nl

cMR

l

hMR nl

hMR




34


under Scenario C when consumers remain indifferent between food nanotechnology

and conventional food technology under labeling (l nln n c ).

X

c

nl*

Profit Gain

nl

hP

Price

*nl

cP

Quantity

D

c

nl

X

n

nl*

Profit Loss

Quantity

C

n

nl

P

h

nl +V

Price

Pn

nl*

2(h + c)

D

n

nl

nl nl

c nU P U V P

l l

c nU P U V P

nl

hU P

nl

c

h

X

c

l + Xn

l

X

h

l

X

c

nl+ X

n

nl

X

h

nl

*

Profit Gain

Quantity

C

h

nl

nP V h c

Price

P

h

nl*

X

h

nl*

h c

D

h

l

Consumer

Welfare Loss

2(h + c)

P

h

l +V

2(h + nl )

D

n

l

C

n

l

Pn

l*

P

h

l*

l

nP V h c

X

n

l*

h c

X

h

l*

P

h

l

P

c

l*

X

c

l*

2(h + c)

C

c

D

c

l

l

hU P

**

D

h

nl

nl

nMR

l

nMR

l

cMR

nl

cMR

l

hMR nl

hMR





35


under Scenario C when consumers become more averse to food nanotechnology under

labeling ( l nln n c ).

X

c

nl*

Profit Gain

nl

hP

Price

*nl

cP

Quantity

D

c

nl

X

n

nl*

Profit Loss

Quantity

C

n

nl

P

h

nl +V

Price

Pn

nl*

2(h + c)

lnD

nl nl

c nU P U V P

l

nU V P

nl

hU P

nl

c

h

X

c

l X

h

l

X

c

nl+ X

n

nl

X

h

nl

*

Profit Gain

Quantity

C

h

nl

nP V h c

Price

P

h

nl*

X

h

nl*

h c

D

h

l

Consumer

Welfare Loss

2(h + c)

P

c

l +V ( )( )l

l

h c n c

h n

nlnD

C

n

l

Pn

l*

P

h

l*

P

c

l + h + c

X

n

l*

h c

X

h

l*

( ) ( )l l l

h n

l

n c P h c P

h n

P

c

l*

X

c

l*

ln c

C

c

D

c

l

l

hU P

l

c D

h

nl

l

cU P

X

n

l

c

l

n

nl

nMR

l

nMR l

cMR

nl

cMR

l

hMR

nl

hMR





36

APPENDICES

A.1. New EU Food Labeling Rules

Figure A.1. New EU rule on nanofood labeling, effective December 13, 2014 Source:http://ec.europa.eu/food/food/labellingnutrition/foodlabelling/docs/infographic_food_labelling_rules_2014_en.pdf. A.2. Profit Maximization Problems and Market Equilibrium Quantities and Prices

a) No Labeling of Food Nanotechnology

Scenario A ( nln c n c for )

First Order Conditions

0 ( ) 0nl nl nl

nl nlc c ci c c cnl

i c i

P Xx P X C

x X x

0 1

37

( ) ( )( ) ( )( )0

nl nl nl nl nl nl nlnlc c i h n cc cnl nl nl

c i c

P X x n c P h c P V h c n c XX C

X x X h n

( ) ( )( ) ( )( )( )( )0

nl nl nl nl nlnlnl h n c

c c cnl nl

n c P h c P V h c n c Xh c n cX C

h n h n

( ) ( )( ) ( )

(1 )( )( )

nl nl nl nlnl h n cc nl

c

n c P h c P V h n CX

h c n c

[( ) ( )( )] ( )

(1 )( )

nl nl nl nlnl c h n c

c nl

c

n c P h c P V h n CP

h n

0 ( ) 0nl nl nl

nl nl nln n nk n n nnl

k n k

P Xx P X C

x X x

( ) 0nl nl

nl nl nl nl nln n kn c n nnl nl

n k n

P X xX P V n c X C

X x X

( ) ( ) 0nl nl nl nl nl nl

n n c n nn c X P V n c X C

( )

(1 )( ) 1

nl nl nl nlnl nlc n n c nn nnl

n n

P V C P V CX P

n c

0 ( ) 0nl nl nl

nl nlh h hj h h hnl

j h j

P Xx P X C

x X x

( ) 0nl nl

j nl nl nlh hh c n hnl nl

h j h

xP XX P h c h c X C

X x X

( ) ( ) 0nl nl nl

h h c h hh c X P h c h c X C

( )

(1 )( ) 1

nl nlnl nlc h h c hh h

h h

P h c C P h c CX P

h c

where c ,nand h

are conjectural variation elasticities capturing the market power of the

conventional, nanofood, and organic food product suppliers, respectively.23

23

1

1,

cN nlc i

c nlc i ci

dX x

N dx X

1

1,

nN nln k

n nln k nk

dX x

N dx X

and1

1.

hN nljh

h nlh j hj

xdX

N dx X

38

Market Equilibrium Quantities and Prices

*( )(1 ) ( )(1 ) ( ) ( )(1 ) (1 )( )

( )( )(1 ) ( )(1 )(1 ) ( ) ( )

( ) ( ) ( ){1 (1 ) 1

nl nl nl nlc n h n h h nnl

c nl nl nl nlc h n c h n

nl nl nl nc c h n n h

h n n c C h c V C n cX

h c n c h n h n h c n c

C h n h c n c h n c h n

(1 ) }

( )( )(1 ) ( )(1 )(1 ) ( ) ( )

l nln

nl nl nl nlc h n c h n

c h n

h c n c h n h n h c n c

Xnnl*

V (h nnl )(1h) (nnl c)

c (h nnl )(1

h)C

cC

n(nnl c)

c (h nnl )(1

h)

(nnl c) (h nnl )(1h) (nnl c)(1

n)

ch nnl (h c)

h (nnl c)

n

*( )(1 ) ( ) ( )(1 ) ( ) ( ) ( )(1 )

( ) ( )(1 )(1 ) ( ) ( )

nl nl nl nl nl nln n n c n h c nnl

h nl nl nlh n c h n

h n C h c h n h n V n c C h c h nX

h c h n h n h c n c

*

*

( )(1 )(1 ) ( )(1 ) ( ) ( )(1 )( )

( )(1 )(1 ) ( ) ( )

( )(1 ) ( ) ( )(1 )( ) ( )

nl nl nl

c h n c n h h h nnl

c nl nl nl

h n c h n

nl nl nl nl nl nl

n h c h n h n cnl

n

C h n n c h c C h c C VP

h n h n h c n c

C h n h n h c h n C V n c VP

( )

( )(1 )(1 ) ( ) ( )

h h

nl nl nl

h n c h n

C h c

h n h n h c n c

*

( )(1 ) ( ) ( )(1 )( )

( )(1 )(1 ) ( ) ( )

( ) ( ) ( )

( )(1 )(1 ) ( ) ( )

nl nl nl nl nl

h n c n n n nnl

h nl nl nl

h n c h n

nl nl nl

n c n

nl nl nl

h n c h n

C h n h n n c h n C c hP

h n h n h c n c

h c h n C V n c

h n h n h c n c

Scenario B ( nln c n c for )


( )

(1 )( ) 1

( ) ( ) ( )( )

(1 )( )( )

[( ) ( ) ( ) ] ( )

(1 )( )

(1

nl nlnl nln c c n cc cnl

c c

nl nl nl nl nlnl h c nn nl nl

n

nl nl nl nl nlnl n h c n

n

n

nl nlnl n hh

P V C P V CX P

c n

c n P h n P h c V CX

c n h n

c n P h n P h c V h c CP

h c

P V h n CX

( )

)( ) 1

nl nlnl c n h

hnl

h h

P V h n CP

h n

0 1

39


Xc

nl* (h c)(1

h)(C

n

nl V ) n(c nnl ) C

h (h nnl )

h C

c(h c)(1

h) (c nnl )

n

(c nnl ) (h c)(1n)

c(h c)(1

h) (c nnl )

n h

h c (h nnl )n

*( ) ( )(1 ) ( )(1 ) ( )

( )( )(1 ) ( )(1 ) ( )(1 ) ( ) ( )

( ) (2 ) 2 2( )

( )( )(1

nl nl nl

h c c h hnl

n nl nl nl nl

n n c h n h n

nl nl

h c h

nl nl

h c h n C c n C h nX

c n h n h c h c c n h c h n

V h c h c c h n c h n h c

c n h n

) ( )(1 ) ( )(1 ) ( ) ( )

( ) ( )(1 ) ( )(1 ) ( ) ( )(1 )

( )( )(1 ) ( )(1 ) ( )(1 ) ( ) (

nl nl

n n c h n h n

nl nl nl nl

n h c c h n c

nl nl nl n

n n c h n h

h c h c c n h c h n

h c h n C c n C h n c n V


)

( )(1 ) ( ) ( )

( )( )(1 ) ( )(1 ) ( )(1 ) ( ) ( )

l

n

nl nl nl

n n c h

nl nl nl nl

n n c h n h n

C h c h c c n h n


*

( )(1 )( ( ) ( )

( ) ( )(1 )(1 ) ( ) ( )

( )(1 ) ( )

( ) ( )(1 ) ( )(1 ) ( ) (

nl nl nl nl

c n c c nnl

h nl nl nl

h n c h n

nl

h c n

nl nl n

n c h n h

h c h n V C h c C c n h nX

h c h n h n h c c n

C h c h n

h n h c h c c n h c h n

)l

n

*( )(1 ) ( )

( )(1 ) ( )(1 ) ( ) ( )

( )(1 )( ) ( ) ( )

( )(1 ) ( )(1 ) ( ) (

nl

c n h nnl

c nl nl

n c h n h n

nl nl nl

c h n n h h

nl nl

n c h n h n

C h c h c h nP

h c h c c n h c h n

h c C V c n C h n

h c h c c n h c h n

)

* ( )(1 )(1 )

( )(1 ) ( )(1 ) ( ) ( )

( ) ( ) ( )(1 ) ( ) ( )(1 )

( )(1 ) ( )(1 ) ( )

nl

nl n h c

n nl nl

n c h n h n

nll nl nl nl nl

n n h c h h h c

nl

n c h n

C h cP

h c h c c n h c h n

V h c c n h n c n h n C h n C

h c h c c n

( )nl

h nh c h n

*( )(1 ) ( )

( )(1 ) ( )(1 ) ( ) ( )

( )(1 )( ) ( ) ( )

( )(1 ) ( )(1 ) ( )

nl

h n c nnl

h nl nl

n c h n h n

nl nl nl

h c n n c c

nl

n c h n h

C h c h c c nP

h c h c c n h c h n

h c C V h n h n h c C c n

h c h c c n h c

( )nl

nh n

40

Scenario C ( nln c n c for0 1 ):


2(1 )( ) 1

( )

2(1 )( ) 1

( )

(1 )( ) 1

nl nlnl nlh c c h cc c

c c

nl nl nl nlnl nlh n n h nn n

n n

nl nlnl nln h c n hh h

h h

P C P CX P

h c

P V C P V CX P

h c

P V h c C P V h c CX P

h c


*

*

*

( )

2( )(1 )

(1 ) [ ( )(1 )] (1 )

2( )(1 )(1 )

( )(1 )

( )(1 )

nl h h c

c

c h

nl h c h c c c h

n

c h n

nl c c h

h

c h

nln

C h c CX

h c

C C h c CX

h c

C h c CX

h c

* [ ( )] (1 )

1

nl c h h h c

c

c h

C h c CP

* * [ ( )] (1 ) (1 )

1

nl nl c h h h c c h

n c

c h

C h c C VP P V

* [ (1 )( )] (1 )

1

nl h c c h h

h

c h

C h c CP

b) Labeling of Food Nanotechnology

The derivation of the FOCs under a labeling regime is the same as under a no labeling

regime. Corresponding expressions can be derived depending on the outcome and scenario

considered, e.g., whether there are two or three products remaining in the market after

nanofood labels are introduced, or whether consumers become more (or less) averse to food

nanotechnology than conventional food production methods. The subscript ‘ nl ’ is replaced

by ‘ l ’ to indicate results in the labeling regime.

41

A.3. The Effect of Labeling Costs and Market Power of Nanofood Suppliers on the

Equilibrium Nanofood Quantity and Price.

Scenario A:

After labeling: consumer aversion to nanofoods increases or remains the same ( )l nln n

1

1

l l nl nlc n c n

ll l nln n n nl

n

XP V C P V C

n c n cX X

( ) ( ) ( )

1 1 1

l l nl nl l ln c n n c n n c n

n

nl nll l nl n

n nn n

cn

P V C P V C P CP CP P P

01

1

l ln nl ln n n

P P

C C

0

1

(1 )( )

ln

l ln n

X

C n c

20

(1 )

l l ln c n

nn

P P C

20

1

(1 )

nl nll l lc n c n

n

n

nl l

n

P V C P V C

n c

X

n c

0l l

n nl l

P P

n n

20

1

1 ( )

l l ln c n

l ln

X P V C

n n c

Note that since l

nC and ln are arguments only in the l

nP expression it follows that l l

n nl ln n

P P

C C

and

l ln n

l l

P P

n n

.

Scenario B:

After labeling: consumer aversion to nanofoods increases l nln n and consumers become

more averse to nanofoods than conventional foods ln c

( ) ( ) ) ][ ( ) (

1 (1

( )

)( )

nl nl nll l nl h

l l nl nln c n n

n n

c nn n n

h n P h c h c CP P

P V C c n P VP

h c

Xnl Xn

l Xnnl

Pcl V C

nl

(1n )(nl c)

(c nnl )Phnl (h nnl )P

cnl (h c)(V C

nnl )

(1n )(c nnl )(h nnl )

01

1

l ln nl ln n n

P P

C C

0l l

n nl l

P P

n n

42

After labeling: consumer aversion to nanofoods increases l nln n but consumers remain

less averse to nanofoods than conventional foods ln c

[( ) ( ) ( ) ( ) ] ( )(

(1 )( )

)l l nl nl l l nl nl l nll n h h c c n n

nnl

n

ln nP

c n P c n P h n P h n P h c C CP

h cP

( ) ( ) ( )( ( ) ( ) ( )(

(1 )( )( ) (1 )( )( )

) )

l l nln n n

l l l l l nl nl nl nl nlh c n h c n

l l nl nln n

X X X

c n P h n P h c V C c n P h n P h c V C

c n h n c n h n

10

1

l l

n n

l l

n n n

P P

C C

0(1 )( )

l l l

n n n n

l l

n

P P P

n n h c

.

After labeling: consumer aversion to nanofoods decreases ( l nln n c )

( ) ( ) ( )( ( ) ( ) ( )(

(1 )( )( ) (1 )( )( )

) )

l l nln n n

l l l l l nl nl nl nl nlh c n h c n

l l nl nln n

X X X


c n h n c n h n

[( ) ( ) ( ) ( ) ] ( )(

(1 )( )

( ( ) [ ( ) ( )) ]

)l l nl nl l l nl n

l l lh c n

l l nll l nl n h h c c n n

n n nn

nl nl nl l l ln n h c h c

c n P c n P h n P h n P h c C CP P P

h c

c h h cP P C n P P n P P

Assuming consumers always prefer the use of organic technology to other food production

methods, including the use of food nanotechnology (i.e., h nl ), then

0l l

n nl ln n

P Ph c

C C

0

(1 )( )( )

ln

l l ln n

X h c

C c n h n

( ) ( ) ( ) ( >) 0l

l l nl nl nl l l l nl lh

l lnh c hc c c

nhc h n P P n P P c n hP n

PP P P

given

0 and 0l lh cP P .

2 2

( ) ( ) ( )( ( ) ( ) ( )(

(

) )

(1 ) (1 )

1 > 0 if 0 and vice versa.

)( ) )

1

( )(

ln

n n

l ln n

n

nl nl nl nl nl l l l l lh c n h c n

nl nl l ln


c n h n n

X

X

c

X

h n

43

( ) 0l l

l ln nn h cl l

P PP P

n n

2 2

2 2

{[( ) (( ) ( ) ( )(

(1 )( ) )

]} )

(

)l l ln

l l l l lc h n

l ln

l

h n P c n P h c V C

c n h n

X c n h n

n

ö0.

Scenario C:

After labeling: consumer aversion to nanofoods is unchanged ( l nln n c )

1 1 1

l nl ll c h c c h c c h

c

c c c

P C P C PP

( ) ( )

1 1 1

l l nl nl l ll n h n n h n n h n

n

n n n

P V C P V C P CP

(*)

( ) ( )

1 1 1

l nl ll h n h h n h h n

h

h h h

P V h c C P V h c C PP

(**)

Substitute (**) into (*):

(1 ) (1 )0

(1 )(1 ) 1

l l ll ln h n h n h n

n n

n h n h

P C CP P

It follows that,

(1 )0

1 1 1

l ll h h n h n

h

h n h n h

C CP

and l l

h nP P

01 1

ll c h n

c

c n h

CP

and l l

c hP P

Also, given 1

ll h n

h

n h

CP

, we have

2(1 )( ) 2(1 )( ) 2(1 )( )

02(1 )( )

l l nl nl l lnl h n h n h nn

n n n

l

n

n h

P V C P V C P CX

h c h c h c

C

h c

02(1 )( ) 2(1 )( ) 2(1 )( )

l nl ll h c h c hc

c c c

P C P C PX

h c h c h c

44

Figure A.4. Effect of nanofood labeling on nanofood supplier profits

0(1 )( ) (1 )( ) (1 )( )

l nl lnl n h n h nh

h h h

P V h c C P V h c C PX

h c h c h c

.

Moreover,

10

1

lnln n

P

C

1

02(1 )( )

ln

ln n h

X

C h c

20

(1 ) (1 )(1 )

l l l ln h n n

n n n h n

P P C C

2

10

2(1 ) ( )

l

n

n n h

X

h c

A.4. Simulation Results of the Effect of Nanofood Labeling on Nanofood Supplier Profits

Figure A.4 depicts the changes in the profits of nanofood suppliers when consumers are more

averse to food nanotechnology than conventional technology under a no labeling regime and

consumer aversion increases under a labeling regime for [0, 2].n Parameter values are

given as follows: 5,V 2,nC 1.7,cC 2.4,hC 0.54,n 0.44,c 0.7,h 1.91,c

1.2.h The three curves represent the profits of nanofood suppliers when production costs

take values between 1 and 3 with the dashed curves being the lower and upper bounds. The

greater is consumer aversion to food nanotechnology and the greater are labeling costs, the

small are nanofood supplier profits.

45

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