Project Title: Market failure and food claims:

An assessment for Health Canadaby

J. K. Smith

Master of Food and Resource Economics, The Faculty of Land and Food Systems

THE UNIVERSITY OF BRITISH COLUMBIA(Vancouver)

DATE

Table of Contents Table of Contents 2List of Tables 3List of Figures 4List of Abbreviations 5

SECTION 1 Introduction...................................................................................61.1 Project Motivation 61.2 Project Objectives 71.3 Methods 7

SECTION 2 Literature Review or Background..................................................8EXAMPLE: 82.1 Food Manufacturers’ Use of Claims 8

SECTION 3 Methodology..................................................................................9SECTION 4 To 7.............................................................................................10SECTION 5 Discussion of Results and Conclusions........................................11References.....................................................................................................12Appendices.....................................................................................................13

Appendix A. Excel Worksheets Used to Develop Aggregate Demand14

Appendix B. Total Number and Percentage of Products by Product Category (N=1677) 16

Appendix C. Demographics of Focus Groups Participants 17

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List of TablesNo table of figures entries found.

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List of Figures Figure 1.1: Use of Food Labelling Information by Players in the Processed Food

Industry...........................................................................................................6

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List of AbbreviationsCCHS Canadian Community Health Survey CFIA Canadian Food Inspection AgencyCPLA Consumer Packaging and Labelling Act FTC Federal Trade CommissionFDA Food and Drugs Act FDR Food and Drug Regulations SSS Standard Serving SizeUBC The University of British Columbia U.S. United StatesUSDA United States Department of Agriculture

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SECTION 1 Introduction1.1 Project Motivation

CHECK THE DOCUMENT FOUND ON THE COURSE BLOG TITLED: Proposal details - May 12 FOR DETAILS REGARDING WHAT TO PLACE IN THIS SECTION.

EXAMPLE: Asymmetric information exists in an industry when buyers and sellers have

different amounts of information regarding the attributes of a product. From a public policy point of view, asymmetric information is a major concern, as the imbalance of information may place buyers at a disadvantage, allowing them to make less informed decisions or be misled by firms for the sake of sales. From an economic policy perspective, asymmetric information is also a concern, as it can influence the operation of a competitive market. In some cases, it may additionally increase the potential of market failure where a suboptimal amount of a particular good is produced, resulting in inefficiently allocated resources. In economic terms, market failure and inefficient allocation of resources result in a reduction of total surplus in the market and may justify government intervention in the market.1

Figure 1.1 illustrates the interface between the three main players in the processed food industry: food manufacturers, consumers and government

1 Market failure results in the inefficient allocation of resources and is measured as the difference in total surplus between a perfectly and imperfectly competitive market. This concept of market failure and total surplus are discussed in further detail in Section Error: Reference source not found.

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Figure 1.1: Use of Food Labelling Information by Players in the Processed Food Industry

1.2 Project Objectives CHECK THE DOCUMENT FOUND ON THE COURSE BLOG TITLED: Proposal details - May 12 FOR DETAILS REGARDING WHAT TO PLACE IN THIS SECTION.

EXAMPLE:The overarching objective is “Does the potential for market failure occurring

in the processed food industry increase as a result of exaggerated product claims which encourage consumers to overestimate product quality and over-consume suboptimal foods?” Three sub-questions are asked.

I. What product strategy in terms of claims and nutrient levels would food manufacturers use given consumer demand and the existence of asymmetric information in the industry?

II. Do exaggerated product claims have a significant presence in the current marketplace, and if so, what is the nature of these claims?

III. How do consumers utilize (e.g., use and understand) nutrition information and product claims when assessing product quality?

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1.3 Methods CHECK THE DOCUMENT FOUND ON THE COURSE BLOG TITLED: Proposal details - May 12 FOR DETAILS REGARDING WHAT TO PLACE IN THIS SECTION.

EXAMPLE:The research methodology used in the dissertation is a sequential two-stage

multi-method research design (Tashakkori & Teddlie, 2003; Teddlie & Tashakkori, 2009). Stage one of the research design addresses research questions I and II with a quantitative food manufacturer-focused inquiry, where a monopoly firm’s product strategy decision, given exogenous consumer demand, is reviewed using an extended vertical product differentiation structural model. The product strategies results from the economic model are examined using empirical data with the aim to highlight the significant presence of exaggerated product claims in the complex real-world marketplace. Stage two addresses research question III with a qualitative consumer-focused inquiry reviewing how consumers’ utilize nutrient information, claims and exaggerated product claims in their product quality assessment and selection. Data for stage two was collected via a set of eight focus groups at four locations in the Vancouver, British Columbia. The overarching research question regarding the impact of exaggerated product claims on the potential of market failure is addressed by merging the results from stage one and two.

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SECTION 2 Literature Review or Background

CHECK THE DOCUMENT FOUND ON THE COURSE BLOG TITLED: Proposal details - May 12 FOR DETAILS REGARDING WHAT TO PLACE IN THIS SECTION.

EXAMPLE:

2.1 Food Manufacturers’ Use of Claims Food manufacturers are using an increasing number and type of claims as

part of their product differentiation strategy. From 1997 to 2001, U.S.2 food manufacturers’ use of health claims on product packages increased from 4% to 4.4% and use of nutrient content claims increased from 39% to 49.7% (Brecher and Bender 2000; Legault et al. 2004; Zarkin and Anderson 1992). The greater use of nutrient content claims compared to health claims has been attributed to the less stringent policies with the former (Parker 2003). As well, since 1992, food manufacturers have redistributed their use of claims between food product categories. For example, between 1992 and 1999, manufacturers’ use of nutrient content claims increased in the categories of soup, vegetables and soft drinks and decreased in the categories of oils, cookies and entrees (Caswell et al. 2003; Williams et al. 2003).

2 It should be noted that although many of the studies referenced in this section are associated with United States food manufacturers they are applicable to Canada. The major reason for this is the multinational nature of the processed food industry where processed food products sold in Canada and the U.S. are often manufactured by the same firms (e.g., Kraft, Nestle, General Mills, Frito-Lay, and PepsiCo.). Details regarding similarities and differences in U.S. and Canadian label regulations are provided in Section Error: Reference source not found.

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SECTION 3 Methodology

CHECK THE DOCUMENT FOUND ON THE COURSE BLOG TITLED: Proposal details - May 12 FOR DETAILS REGARDING WHAT TO PLACE IN THIS SECTION.

EXAMPLE:

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SECTION 4 To 7

These sections will be specific to your own project and make contain section such as the following:

Industry Analysis

Project One: Review of Technologies used to Assess Environmental Feasibility of Electric Bicycle

Project Two: Review of Technologies used to Assess Environmental Feasibility of Electric Cars

Target Market Analysis for Purple Ketchup: Who is the client?

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SECTION 5 Discussion of Results and Conclusions

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References Brecher, Susan J. and Mary M. Bender (2000). "Status of nutrition labeling, health claims, and nutrient content claims for processed foods: 1997 Food Label and Package Survey," Journal of the American Dietetic Association, Vol. 100, No. 9, pp. 1057.

Caswell, Julie A., Yumei Ning, Fang Liu, and Eliza M. Mojduszka (2003). "The Impact of New Labeling Regulations on the Use of Voluntary Nutrient-Content and Health Claims by Food Manufacturers," Journal of Public Policy & Marketing, Vol. 22, No. 2, pp. 147-158.

Legault, Lori, Mary Bender Brandt, Nancie McCabe, Carole Adler, Anna-Marie Brown, and Susan Brecher (2004). "2000–2001 food label and package survey: an update on prevalence of nutrition labeling and claims on processed, packaged foods," Journal of the American Dietetic Association, Vol. 104, No. 6, pp. 952-958.

Parker, Betty J. (2003). "Food for Health," Journal of Advertising, Vol. 32, No. 3, pp. 47-55.

Williams, Peter, Heather Yeatman, Sally Zakrzewski, Brooke Aboozaid, Simon Henshaw, Kendall Ingram, Alex Rankine, Sara Walcott, and Fatima Ghani (2003). "Nutrition and related claims used on packaged Australian foods - implications for regulation," Asia Pacific Journal of Clinical Nutrition, Vol. 12, No. 2, pp. 138-150.

Zarkin, Gary A. and Donald W. Anderson (1992). "Consumer and Producer Responses to Nutrition Label Changes," American Journal of Agricultural Economics, Vol. 74, No. 5, pp. 1201-1206.

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Appendices

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Appendix A. Excel Worksheets Used to Develop Aggregate Demand

The following steps were used to develop Aggregate Demand and Marginal Revenue graphs for Claim and No-claim Products:

i. Use R to calculate the total units purchased by consumers in Segment 1 (frac_buy) and Segment 2 (frac_buy2) for a claim products (i.e., G=2.50 and B = 03.00) and no-claim product (G= 2.00 and B=-1.50) at combination of price from $2 to $4. S is set at 1.

ii. Copy prices, frac_buy and frac_buy2 values into excel worksheets. Define n2 and n values where n + n2 = 100 and calculate total purchase to calculate in the spreadsheet the quantity demanded by Segment 1 (Qd1) and quantity demanded by Segment 2 (Qd2).

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Develop marginal revenue (MR) values as follows: Regress total purchase (Q) to price, price2 and price3 to obtain coefficients for

price, price2 and price3 that can be used forecasted total purchase (Q-forecast). This allows smaller and smoother increments between total purchase and supports more accurate marginal revenue values.

Calculate marginal revenue as change in total revenue (price times Q-forecast) from prior year to current year divided by change in total purchase for those same years.

iii. Create a section of the spreadsheet that contains values of price, total purchase

(Q), quantity demanded by Segment 1 (Q1), quantity demanded by Segment 2 (Q2), marginal revenue (MR) and marginal cost (MC).

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Appendix B. Total Number and Percentage of Products by Product Category (N=1677)

Product Category Number Percentage

Cookies 180 10.73%Canned And Box Soup 134 7.99%

Frozen Pizza 54 3.22%Breakfast Cereal 130 7.75%

Canned Beans 22 1.31%Crackers 124 7.39%

Instant Oatmeal 34 2.03%Granola Bars 73 4.35%Breads 51 3.04%Yogurt 85 5.07%Frozen Meals For One 85 5.07%

Vegetarian Items 39 2.33%

Hard Cheese 32 1.91%Processed Cheese 57 3.40%

Pasta Sauces 76 4.53%Salad Dressings 156 9.30%

Potato Chips 94 5.61%Juices 190 11.33%Margarine And Spreads 25 1.49%

Butter 13 0.78%Peanut Butter 23 1.37%Total 1677 100.00%

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Appendix C. Demographics of Focus Groups Participants

MOUNT PLEASANT COMMUNITY CENTREGenderFemale 14Male 1Total 15 Age18-29 years 430-49 years 550-64 years 665 and over 0Total 15 Marital StatusSingle 6Married 3Living Common-law 3Separated 3Widowed 0Total 15 Employment StatusEmployed 8self employed 2Out of work but looking for work 0Out of work but NOT looking for work 1Homemaker 2Student 0Retired 1Unable to work 0Total 14 

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