Nutritional Labeling and Consumer Choices

In 1994, nutritional facts panels became mandatory for processed foods to improve consumer access to nutritional information and to promote healthy food choices. Recent applied work is reviewed here in terms of how consumers value and respond to nutritional labels. We first summarize the health and nutritional links found in the literature and frame this discussion in terms of the obesity policy debate. Second, we discuss several approaches that have been used to empirically investigate consumer responses to nutritional labels: (a) surveys, (b) nonexperimental approaches utilizing revealed preferences, and (c) experimentbased approaches. We conclude with a discussion and suggest avenues of future research. INTRODUCTION How the provision of nutritional information affects consumers’ food choices and whether consumers value nutritional information are particularly pertinent questions in a country where obesity is pervasive. Firms typically have more information about the quality of their products than do consumers, creating a situation of asymmetric information. It is prohibitively costly for most consumers to acquire nutritional information independently of firms. Firms can use this Publisher: ANNUALREVIEWS; Journal: ARRE: Annual Review of Resource Economics; Copyright: Volume: 3; Issue: 0; Manuscript: 3_McCluskey; Month: ; Year: 2011 DOI: ; TOC Head: ; Section Head: ; Article Type: REVIEW ARTICLE Page 1 of 30 information to signal their quality and to receive quality premiums. However, firms that sell less nutritious products prefer to omit nutritional information. In this market setting, firms may not have an incentive to fully reveal their product quality, may try to highlight certain attributes in their advertising claims while shrouding others (Gabaix & Laibson 2006), or may provide information in a less salient fashion (Chetty et al. 2007). Mandatory nutritional labeling can fill this void of information provision by correcting asymmetric information and transforming an experience-good or a credence-good characteristic into search-good characteristics (Caswell & Mojduszka 1996). Golan et al. (2000) argue that the effectiveness of food labeling depends on firms’ incentives for information provision, government information requirements, and the role of third-party entities in standardizing and certifying the accuracy of the information. Yet nutritional information is valuable only if consumers use it in some fashion. Early advances in consumer choice theory, such as market goods possessing desirable characteristics (Lancaster 1966) or market goods used in conjunction with time to produce desirable commodities (Becker 1965), set the theoretical foundation for studying how market prices, household characteristics, incomes, nutrient content, and taste considerations interact with and influence consumer choice. LaFrance (1983) develops a theoretical framework and estimates the marginal value of nutrient versus taste parameters in an analytical approach that imposes a sufficient degree of restrictions to generality to be empirically feasible. Real or perceived tradeoffs between nutritional and taste or pleasure considerations imply that consumers will not necessarily make healthier choices. Reduced search costs mean that consumers can more easily make choices that maximize their utility. Foster & Just (1989) provide a framework in which to analyze the effect of information on consumer choice and welfare in this context. They argue that Publisher: ANNUALREVIEWS; Journal: ARRE: Annual Review of Resource Economics; Copyright: Volume: 3; Issue: 0; Manuscript: 3_McCluskey; Month: ; Year: 2011 DOI: ; TOC Head: ; Section Head: ; Article Type: REVIEW ARTICLE Page 2 of 30 when consumers are uncertain about product quality, the provision of information can help to better align choices with consumer preferences. However, consumers may not use nutritional labels because consumers still require time and effort to process the information. Reading a nutritional facts panel (NFP), for instance, necessitates that the consumer remove the product from the shelf and turn the product to read the nutritional information on the back or side. In addition, consumers often have difficulty evaluating the information provided on the NFP or how to relate it to a healthy diet. Berning et al. (2008) present a simple model of demand for nutritional information. The consumer chooses to consume goods and information to maximize utility subject to budget and time constraints, which include time to acquire and to process nutritional information. Consumers who have strong preferences for nutritional content will acquire more nutritional information. Alternatively, other consumers may derive more utility from appearance or taste. Following Becker & Murphy (1993), Berning et al. show that nutritional information may act as a complement to the consumption of products with unknown nutritional quality, similar to the way advertisements complement advertised goods. From a policy perspective, the rise in the U.S. obesity rate coupled with the asymmetry of information have resulted in changes in the regulatory environment. The U.S. Food and Drug Administration (FDA) is currently considering a change to the format and content of nutritional labels, originally implemented in 1994 to promote increased label use. Consumers’ general understanding of the link between food consumption and health, and widespread interest in the provision of nutritional information on food labels, is documented in the existing literature (e.g., Williams 2005, Grunert & Wills 2007). Yet only approximately half Publisher: ANNUALREVIEWS; Journal: ARRE: Annual Review of Resource Economics; Copyright: Volume: 3; Issue: 0; Manuscript: 3_McCluskey; Month: ; Year: 2011 DOI: ; TOC Head: ; Section Head: ; Article Type: REVIEW ARTICLE Page 3 of 30 of consumers claim to use NFPs when making food purchasing decisions (Blitstein & Evans 2006). Moreover, self-reported consumer use of nutritional labels has declined from 1995 to 2006, with the largest decline for younger age groups (20–29 years) and less educated consumers (Todd & Variyam 2008). This decline supports research findings that consumers prefer for short front label claims over the NFP’s lengthy back label explanations (e.g., Levy & Fein 1998, Wansink et al. 2004, Williams 2005, Grunert & Wills 2007). Furthermore, regulatory rules and enforcement policies may have induced firms to move away from reinforcing nutritional claims through advertising (e.g., Ippolito & Pappalardo 2002). Finally, critical media coverage of regulatory challenges (e.g., Nestle 2000) may have contributed to decreased labeling usage over time. Excellent review papers on this topic preceded and inspired this present review (e.g., Baltas 2001, Williams 2005, Drichoutis et al. 2006). In particular, Drichoutis et al. (2006) reviews the nutritional labeling literature and addresses specific issues regarding the determinants of label use, the debate on mandatory labeling, label formats preferred by consumers, and the effect of nutritional label use on purchase and dietary behavior. The current review article updates and complements these earlier reviews by focusing on recent work and highlighting major contributions in applied analyses on how consumers value, utilize, and respond to nutritional labels. We first cover the health and nutritional aspects of consumer food choices found in the literature to frame the discussion on nutritional labels in the context of the recent debate on obesity prevention policies. Second, we discuss the different empirical approaches that are utilized to investigate consumers’ response to and valuation of nutritional labels, classifying existing work into three categories according to the empirical strategy and data sources. First, we present findings based on consumer surveys and stated consumer responses to Publisher: ANNUALREVIEWS; Journal: ARRE: Annual Review of Resource Economics; Copyright: Volume: 3; Issue: 0; Manuscript: 3_McCluskey; Month: ; Year: 2011 DOI: ; TOC Head: ; Section Head: ; Article Type: REVIEW ARTICLE Page 4 of 30 labels. The second set of articles reviewed utilizes nonexperimental data and focuses on estimating consumer valuation of labels on the basis of revealed preferences. Here, the empirical strategy is structural, using hedonic methods, structural demand analyses, or discrete choice models and allowing for estimation of consumers’ willingness to pay (WTP) for nutritional information. The last set of empirical contributions discussed is based on experimental data, differentiating market-level and natural experiments from laboratory evidence. These studies employ mainly reduced-form approaches. Finally, we conclude with a discussion of avenues for future research. CONSUMER FOOD DEMAND, NUTRITIONAL LABELS, AND OBESITY PREVENTION The U.S. Department of Health and Public Services declared the reduction of obesity rates to less than 15% to be one of the national health objectives for 2010, yet in 2009 no state met these targets, with only two states reporting obesity rates less than 20% (CDC 2010). Researchers have studied and identified many contributing factors, such as the decreasing relative price of caloriedense food (Chou et al. 2004) and marketing practices that took advantage of behavioral reactions to food (Smith 2004). Other researchers argue that an increased prevalence of fast food (Cutler et al. 2003) and increased portion sizes in restaurants and at home (Wansink & van Ittersum 2007) may be the driving factors of increased food consumption. In addition, food psychologists have focused on changes in the eating environment, pointing to distractions such as television, books, conversation with others, or preoccupation with work as leading to increased food intake (Wansink 2004). Although each of these factors potentially contributes to the obesity epidemic, they do not necessarily mean that consumers wi