The Economics of Food Safety Communication Dissertation Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Ji Li, M.A. Graduate Program in Agricultural, Environmental, and Development Economics The Ohio State University 2009 Dissertation Committee: Neal H. Hooker, Advisor Thomas Sporleder Matthew Roberts © Copyright by Ji Li 2009 Abstract This dissertation is composed of three essays about timely food safety issues in the food and agribusiness marketing. In Chapter 1, responding to increasing customer attention to food attributes agribusinesses are employing novel product differentiation strategies. As an example, the use of food safety claims on new packaged food products are investigated from the food manufacturers’ perspective. First, using two product innovation databases, we investigate claim use on labels in seven English speaking countries over the period 1980 to 2008. Then, based on manufacturer recommended selling prices and using US data (from 2002 to 2008) we apply parametric and nonparametric hedonic methods to identify supply-side (agribusiness) valuations of chemical and microbiological claims in two food categories. We identify a significant 5 cent premium per ounce for a preservative free claim in spoonable yogurts. We do not find a statistically significant impact for E. coli free messages on meat and poultry products but find a significant price premium ($0.193 and $0.257 per ounce in the two models) for antibiotic free claims in this category. Chapter 2 explores consumer reaction and attempt to personalized food recall notifications. Foodborne illness outbreaks can pose serious threats to consumers. To protect public health, when food companies discover that a food product has been ii implicated in an outbreak or is found to contain unacceptable levels of contaminants, they usually voluntarily issue a recall notice to recover any unconsumed products thought to pose a risk. While recovering unsold products from retailers is relatively straightforward, reaching consumers has proven more difficult. Through their shopper loyalty card programs, many retailers have the ability to identify and communicate recall information to customers who have purchased foods that become subject to a recall notice. An analysis of nationally representative survey data collected by telephone from 1,101 American adults in August and September 2008 suggests that most consumers (70%) are interested in such a service. Almost fourteen percent would be willing to pay for such a service (mean willingness to pay $67). The results of an ordered logit model suggest that consumers who are younger, who are caregivers for children, have had experience with foodborne illness, share shopping responsibilities with someone else in their household and those who are unemployed appear most interested, and willing to pay, for such a personalized recall notification service. Chapter 3 is centered on pet food recalls. In 2007 the pet food industry encountered a series of recall shocks which attracted considerable attention from the public, media, regulatory bodies and most likely shareholders. Exploring a financial market perspective, this study investigates the influence of recall announcements on three publicly traded pet food companies: Procter & Gamble, Co., Del Monte Foods, Co., and Colgate-Palmolive, Co. An event study, Generalized Autoregressive Conditional Heteroscedasticity (GARCH) and Seemingly Unrelated Regression system (SUR) iii estimations are conducted and compared using daily and intra-day stock prices to explore recall effects. Findings suggest that the announcement of recalls had a significant effect on Del Monte’s stock price but no influence on P&G or Colgate. Firm’s response time and market share appear to be key factors influencing stock price reactions. iv Dedicated to my parents and my husband v Acknowledgments I would like to express my sincere gratitude to my advisor, Professor Neal H. Hooker. Throughout my study at the AEDE department, Professor Hooker has given me constant guidance, invaluable advice and warm encouragement. It is his tremendous support that makes this thesis possible. He has devoted great support to my whole Ph.D. study and career development. His admirable personality and professional ability are of immerse benefit to my study and my life in the future. I also want to thank Professor Tom Sporleder and Professor Matthew Roberts. Not only this dissertation benefits greatly from their great help, but also they have offered me a great deal of time and efforts to my career development. I do appreciate their valuable suggestions and comments on this dissertation and on my career development. I would like to express my sincere thanks to Professor Alan Randall, Professor Abdoul Sam, Professor Brian Roe, Professor Stan Thompson, Professor Stan Ernst, Professor Lynn Forster, Professor Carl Zularf, etc. Thank you so much for your time and help. My special thanks go to my parents and husband. Without you, none of my achievements would have been possible. Your trustful and unlimited love has supported me in every step of my life and will always be my light in my life. Thank you all very much. vi Vita 2001................................................................B.A. Marketing, Jilin University 2005................................................................M.S. Regional Economics, Zhejiang University of Sciences 2006................................................................M.A. Economics, The Ohio State University Fields of Study Major Field: Agricultural, Environmental, and Development Economics vii Table of Contents Abstract……………………………………………………………………………………ii Dedication…………………………………………………………………………………v Acknowledgments………………………………………………………………………..vi Vita………………………………………………………………………………………vii List of Tables……………………………………………………………………………...x List of Figures……………………………………………………………………………xii Chapters: 1. Documenting Food Safety Claims and their Influence on Product Prices……………...1 1.1 Introduction……………………………………………………………………1 1.2 A Background on Food Labels in Different Countries………………………. 3 1.3 Overall Use of Food Safety Claims………………………………………….. 6 1.4 The Hedonic Price Model……………………………………………………15 1.4.1 Data………………………………………………………………17 1.4.2 Empirical Estimation and Results………………………………..18 1.5 A Hedonic Price Model for E. coli Free……………………………………..21 1.6 Nonparametric Models……………………………………………………… 24 1.7 Conclusions…………………………………………………………………..27 1.8 References……………………………………………………………………30 2. Consumer Interest and Engagement Decision in Personalized Food Recall Notification Services…………………………………………………………………………………..36 viii 2.1 Introduction…………………………………………………………………..36 2.2 Consumer Interest Analysis in Personalized Recall Notification Service…..........................................................................................................40 2.2.1 Data………………………………………………………………40 2.2.2 Methodology……………………………………………………..43 2.3 Results and Discussions…………………………………………………….. 46 2.4 Conclusions…………………………………………………………………..50 2.5 Consumer Engagement Decision Analysis of Personalized Recall Notification Service………………………………………………………………………..52 2.5.1 Methodology……………………………………………………..52 2.5.2 Variables…………………………………………………………54 2.6 Results and Discussions…………………………………………………….. 55 2.6.1 The First Stage Probit Regression Analysis………………….. 55 2.6.2 The Second Stage Truncated Regression Model………………58 2.7 Comparison between Derived and Direct Participation Interest……………60 2.8 Conclusion…………………………………………………………………...62 2.9 Reference…………………………………………………………………….65 3. Stock Price Reactions to Pet Food Recalls…………………... ………………………67 3.1 Introduction…………………………………………………………………..67 3.2 Event Study Methodology…………………………………………………...72 3.2.1 Three Publicly Traded Firms…………………………………….72 3.2.1.1 Del Monte Foods, Co…………………………………….72 3.2.1.2 Procter & Gamble Co…………………………………….73 3.2.1.3 Colgate-Palmolive Company…………………………….73 3.2.2 Measuring Normal and Abnormal Returns………………………74 3.3 Event Study Results………………………………………………………….77 3.4 Publicly Traded Firms not Involved in Pet Food Recalls……………………84 3.5 Nestle Purina PetCare Company Analysis…………………………………..85 3.6 Discussions and Implications of Event Study……………………………….86 3.7 Modeling Intra-day Stock Price Responses………………………………….87 3.8 Generalized Autoregressive conditional Heteroscedasticity Method………..89 3.9 Seemingly Unrelated Regression System Estimation………………………..91 3.10 Model Comparisons……………………………………………………...94 3.11 References………………………………………………………………..96 Bibliography………………………………………………………………………………….99 ix List of Tables Table Page Table 1.1 Summary of Food Safety Claims ……………………………………………… 11 Table 1.2 Distribution of Food Safety Claims across Product Categories ………………...14 Table 1.3 Descriptive statistics of the GNPD data (Spoonable Yoghurt) …………………19 Table 1.4 Parametric Hedonic Price Model: GNPD Data …………………………………20 Table 1.5 Descriptive Statistics of PLA Data (Meat and Poultry Products) ………………22 Table 1.6 Parametric Hedonic Price Model: PLA Data …………………………………...24 Table 1.7 Nonparametric Hedonic Model: GNPD Data………………………………….. 25 Table 1.8 Nonparametric Hedonic Model: PLA Data……………………………………...26 Table 2.1 Summary Statistics for the Explanatory Variables across Dependent Variable Categories………………………………………………………………………..42 Table 2.2 Descriptive Statistics of Survey Data…………………………………………....45 Table 2.3 Estimation Results - Consumer Interest………………………………………....47 Table 2.4 Predicted Probabilities of Explanatory Variables