Seminar

Consumers' Costly Response to Product Safety Threats

Rosa Ferrer (Universitat Pompeu Fabra)

October 24, 2016, 14:00–15:30

Room MF 323

Industrial Organization seminar

Abstract

This paper investigates how consumers react to product safety threats when there are no close substitutes for the unsafe product. Our main goal is to study the total costs of the crisis to consumers including the utility losses associated with substituting away from their favorite products, and to derive policy implications. Using data from an ideal setting related to mad cow disease, we estimate a full demand model for meat and identify the utility parameters that weight the importance of product safety relative to other product characteristics. We find that the consumers' response leads to utility losses and nutritional costs due to changes in the composition of the food basket. Counterfactual exercises isolate the different drivers of the consumers' reaction, measuring the contributions of these factors and identifying conditions that would have intensified the decline in demand. Based on our results, public intervention can play a stronger role in terms of complementing market incentives when the threat affects products for which consumers' response is costlier. (joint with Helena Perrone (UPF and Barcelona GSE))