Consumers’ willingness to pay for food quality – The case of eggs

Abstract

Abstract The aim of this paper is to introduce an approach to estimating the marginal willingness to pay (WTP) for food quality and safety using data on actual consumer purchases. Marginal WTP for specific food product varieties can be derived from estimated demand functions by inverting the relations, thereby expressing the prices consumers are willing to pay as functions of quantity demanded. The task addressed in the paper is isolation of the WTP for quality attributes embedded in the varieties. Two models based on the AIDS-specification are proposed and discussed. To illustrate the applicability of the models, the case of five varieties of eggs is presented. It is found that Danish consumers are willing to pay a relatively high premium for improved animal welfare and organic production methods and somewhat less for food safety. Keywords: AIDSeggsMarginal WTPprice elasticityscanner data Notes This paper was originally prepared for the 83rd EAAE Seminar on Food Quality Products in the Advent of the 21st Century: Production, Demand and Public Policy, Sept. 2003, at M.A.I.Ch./CIHEAM. Baltzer, K. (The Royal Veterinary and Agricultural University, Danish Research Institute of Food Economics, Rolighedsvej 25, DK-1958 Frederiksberg C, Denmark). Consumers' willingness to pay for food quality – the case of eggs. Teisl et al. (Citation2002) also use an AIDS-specification to determine consumers WTP for eco-labelled canned tuna. However, they measure the total amount consumers are willing to pay to have all their consumption of canned tuna replaced by the eco-labelled variety. This is similar to a very simple version of Kelvin Lancaster's (Citation1966) product characteristics model, where consumers derive utility from five different characteristics (eggs, barn quality, free-range quality, organic quality and pasteurised quality) and where the marketed goods containing these characteristics are the five varieties. However, while the taxonomy is somewhat similar, the methods used in this paper differ from Lancaster's. The convention has been adopted to note all variables and parameters in the variety model with a ∼. A similar approach has been used by Bonnet & Simioni (Citation2001) to recover prices for non-chosen brands. This can be demonstrated in a simple two-variable regression analysis, , where the OLS-estimator is given by: If for a particular observation, that observation will not have any impact on the estimator. The system goodness-of-fit measure can be written where m is the number of equations in the system, is the ( ) residual covariance matrix and is the ( ) covariance matrix of the dependent variables. It can be shown that single equation version reduces to the usual R2 measure (Edgerton et al., Citation1996). To investigate further, similar models specified in levels (assuming a fixed effects panel structure and first order autocorrelated residuals) were estimated. These specifications showed an improved fit (0.46 and 0.55 respectively), and the estimated parameters were very similar to the first-differenced specifications. However, the first-differenced specifications were chosen due to tractability. The formula (9) yields unbiased price elasticities at the point of normalization, i.e. the budget shares, wi and wj, take the values at which the price index (2) is normalized (Asche & Wessells, Citation1997). Remember that for i 1, , as per assumption each unit of a quality variety contains one unit of quality component.