Consumer Behavior, Public Policy, and Country-of-Origin Labeling
Abstract
Recent work by agricultural economists has failed to adequately identify why consumers desire country-of-origin labeling, a key piece of information needed to determine whether a market-failure exists. This paper brings to the attention of agricultural economists a sizable body of literature on country-of-origin effects from the marketing and business disciplines. Based on this literature, we draw a distinction between several consumer motivations for origin labels and we identify which of these is cause for public policy. We propose several research questions that require answers if the consequences of country-of-origin labeling policy are to be fully understood.
The inclusion of the mandatory country-of-origin labeling (COOL) in the 2002 Farm Bill created a stir in the agricultural community and beyond. Portions of the bill, including mandatory labeling of fish and seafood, have already been put into place. Work by agricultural economists on the issue has focused primarily on quantifying the costs and benefits of COOL and on assessing welfare effects of the policy (e.g., Lusk and Anderson; Brester, Marsh, and Atwood). Proponents of COOL have primarily relied on a “consumer right to know” argument when stating the merits of the policy. Although some studies have suggested that consumers might be willing to pay premiums for meat products of U.S. origin (e.g., Umberger et al., 2003a), beyond the “right to know” argument, comparatively little work has been done to investigate why consumers might want COOL. This is an important distinction because an answer to why consumers want COOL is needed to determine whether a market-failure exists.
Within the business and marketing literatures, a wealth of evidence has accumulated on consumer preferences for country of origin as it relates to products such as cars, food, appliances, and clothes. For example, extensive literature reviews have been conducted by Srinivasan and Subhas, and Papadopoulos and Heslop, with the latter contending that there are over 700 publications related to the effect of country of origin on consumer behavior. The purpose of this comment is to bring this literature to the attention of agricultural economists, summarize some of the findings, and draw inferences for why consumers may desire COOL. The goal is to draw a distinction between several consumer motivations for desiring COOL, based on the marketing and economics literatures, and identify which of these are market failures and thus an impetus for public policy.
Consumer Decision-Making Process
Although it is difficult to predict the outcome of consumers' complex decision-making processes, it is evident that a number of factors are involved. Country-of-origin labels generally serve one of two intertwined purposes for the consumer. First, product quality and origin might be related in the sense that products from certain countries may be better tasting, safer, etc. When products are devoid of labels of origin, consumers are unable to accurately determine a product's true quality. Second, product quality and country of origin might not be related per se, but consumers might prefer products from their country because of an affinity for their home. In recent years, marketers have extended the anthropological concept of ethnocentrism to “consumer ethnocentrism,” which relates to how individuals' buying habits are influenced by loyalties toward their own countries and/or antipathy toward other countries.
Product Quality and Country of Origin are Related
Country of origin is often associated with product quality. Examples are numerous and include French wine, Japanese automobiles, Italian olive oil, etc. Consumers might use country of origin because quality cannot be determined until a product is actually consumed; that is, country of origin is used in place of missing product information. Consumers may use a country's reputation to predict the quality of products. Of course, the quality associated with a particular country may be positive or negative. Just as firms attempt to cultivate and manage brand equity, marketers have coined the term “country equity” to describe the perceived strengths and weaknesses of a country. Unlike brand equity, country equity is not under the primary control of any one firm and is influenced by a myriad of different factors. A country's equity influences how consumers view its products, a phenomenon referred to as a product-country image.
A product-country image can result from objective differences in quality such as taste or can be associated with more psychological concepts. For example, consumers might prefer a product from a particular country because they believe it more prestigious than comparable products from another country or because of a certain mystique associated with the country. Alternatively, consumers might choose goods from a country to obtain social status. Whatever the reason, the voluminous literature on product-country images indicates that these types of images exist and they play an important role in consumers' purchasing behavior.
From a public policy perspective, if a consumer has imperfect information about the quality of the product, markets fail to provide a socially optimal allocation of resources. If country of origin is indeed an important signal of quality to consumers and this information is unavailable, a number of problems might arise. In the classic example, knowing that consumers cannot detect quality, firms will resort to selling the lowest possible quality of a good. Consumers will refuse to buy the product, because they know that only low-quality goods will be sold. In a less extreme case, consumers will make an assumption about the average quality of the product on the market. Because the market will contain products from a variety of origins, the expected quality of the product on the market might well fall below the perceived quality of the domestic product. In such an instance, demand for the product will be lower than when consumers are confident that only the domestic product is sold.
Labeling is the traditional solution to imperfect information. Credible labeling of products as to their origin can allow consumers to weigh the price/quality tradeoff and choose the products they desire, given their particular preferences. Proponents of COOL point to increased concerns over mad cow and foot-and-mouth diseases, and argue that without COOL consumers cannot properly gauge the safety of a product. The key piece of information missing in this debate is the value that consumers place on country-of-origin knowledge. Although a few studies have attempted to measure consumers' willingness-to-pay for products from a particular country, it would also be helpful to know what consumers are willing to pay, to know where a product is from, irrespective of its origin.
Dickinson and Bailey provide some evidence on the value of traceability. But perhaps, what is more interesting is that while voluntary labeling is available to firms, it is seldom utilized, at least in the meat industries. That is, if country of origin is indeed an important cue to consumers in their purchasing decisions, it is perplexing that food firms have not already capitalized on this value and implemented voluntary country-of-origin labels. In cases where origin labels are utilized, they are often used to promote foreign products such as Australian grass-fed beef or New Zealand lamb. An argument could be made that even if labels were profitable, they would not appear in the market because consumers would distrust private firms' attempts to signal quality. However, it would be difficult to reconcile this view with the prolific use of origin labels in nonfood industries and some food sectors.
Consumer Ethnocentrism
Increased accessibility to communicative mediums, such as cell phones and the Internet, has spawned a global marketplace. Greater product availability has ensued, as companies are capitalizing on internationalization and expansion opportunities. With the establishment of a global marketplace, it has been hypothesized that cultural differences are lessening. However, the current conflict in the Middle East and events like September 11, serve as a reminder that the world is still not a cohesive international community, and geographic loyalties likely influence consumer preferences. Following the Gulf War in the early 1990s, the slogan “Made in America” urged American consumers to pledge loyalty to U.S. products, thereby showing their support of overseas military efforts. September 11 and the Afghanistan and Iraqi conflicts led to the quick depletion of American flags in stores, implying that positive U.S. sentiments were developing throughout the country.
In light of such issues, social psychologists argue that individuals need to develop a sense of self and identity with their own nations. Researchers believe that this national identity serves to ground people, affiliating them with a country that provides individuals with a sense of who they are in relation to others. This, as Keane points out (p. 170), “serves as a powerful form of social identity.”
One form of identity is ethnocentrism, a concept developed more than 80 years ago. Patriotism is the most commonly used term to convey national pride and devotion. Ethnocentrism expands patriotism outside of domestic borders, producing feelings of superiority to other nations. Often, social groups with ethnocentric tendencies “view their own group as the center of the universe” and “interpret other social units from the perspective of their own group” (Sharma, Shimp, and Shin, p. 280). The term consumer ethnocentrism was coined to explain how consumption patterns are affected by feelings of national superiority. It seems reasonable to believe that if an individual has loyalty toward their country and/or animosity toward others, their purchasing trends would reflect those views. What research has shown, however, is that ethnocentrism varies across demographics within countries, and even across purchases of different product types.
Some Findings from the Literature on Country-of-Origin Effects and Implications for the Current Policy
- Country of origin can have as large an influence on purchasing behavior as other intrinsic qualities such as taste and other extrinsic cues such as brand name. In some instances, however, it may not have an effect at all. In a meta-analysis including 41 studies and 278 estimates on the effect of country of origin, Verlegh and Steenkamp argue that “… the country-of-origin effect can be classified as a substantial factor in product evaluations” (p. 538).
- Various theories have been advanced to explain how country of origin influences consumer product evaluations. Papadopoulos and Heslop argue that consumers form their views about products from different countries along seven dimensions related to a nation's level of advancement, feelings about a country's people, desire for closer links with a country, quality, price, the level of market penetration of a country's products, and prior satisfaction with a country's products. Verlegh and Steenkamp argue that country-of-origin effects stem from one of three interrelated mechanisms: cognitive (origin is a cue for product quality), affective (origin has symbolic and emotional value), and normative (origin is preferred because of social and personal norms).
- Ethnocentric tendencies, and thus demand for domestic products, typically peak following national security or economic crises. Political elections can also serve to increase consumer ethnocentrism, with politicians contending that buying foreign products hurts the domestic economy. Still, country images are strongly held stereotypes that change slowly. Thus, it is important to keep in mind that data for the studies that have attempted to measure U.S. consumer preferences for the current COOL policy, were collected during times of potentially heightened ethnocentric tendencies. Demand for the COOL policy may be less pronounced in less tumultuous times.1
- Consumer ethnocentrism manifests itself differently across individuals. Older people with lower education and household income levels tend to have higher ethnocentric consumer tendencies. Women appear to have greater ethnocentric tendencies than men. Younger and more highly educated are generally the least ethnocentric (Vida and Dmitrovic, Mayda and Rodrik). These findings may be useful to agribusiness firms interested in market segmentation strategies and may provide some guidance into determining which portions of the population may be most affected by COOL.
- Consumers' responses to survey questions about product origin and their perceptions of international products do not necessarily reflect their actual purchasing behavior. Research such as that by Holt, Quelch, and Taylor indicated that while consumers responded with “anti-American” reactions in opinion-type polls, they still preferred American brand names. Verlegh and Steenkamp found, in a meta-analysis, that country-of-origin effects were significantly larger in studies that used “perceived quality” as the dependent variable when compared with those that used “attitudes” or “purchase intentions.” Their results further indicated that the country-of-origin effect was substantially larger in studies that only investigated origin as compared to studies that considered origin in combination with other cues. They also found that studies that employed within-subject designs found larger country-of-origin effects than between-subject studies. These findings imply that results from studies that use hypothetical polls, within-subject designs, and focus solely on origin as the product cue must be interpreted with caution prior to drawing substantive conclusions about COOL.
- Country of origin is important in shaping consumer perception, even when consumers are presented with additional information about the product (e.g., Cai, Cude, and Swagler). That is, COOL may serve to override other product information that processors or retailers attempt to convey to consumers.
- A country's overall image can spill over into a variety of goods produced by that country. Products from less-developed countries are generally considered to be of lower quality than products of developed countries (Verlegh and Steenkamp). Some research suggests that country of origin has more influence on consumer behavior for goods that are high-risk, expensive, and durable. Because the food products affected by COOL are relatively cheap and nondurable, purchases might be less influenced by country-of-origin signals than the types of goods routinely studied in the business-marketing literature.
- Hybrid goods, with components from several countries or with original production in one country and processing in another, present an interesting challenge. Consumers must determine how to react to multiple-origin cues. Country of design may be an important cue in consumers' decision-making process and might substitute for the actual place of production. Country of assembly, brand name, and other location cues also play into consumers' decision-making process and might be more important than a legally valid “Made in…” label (Ahmed and d'Astous). These findings imply that the manner in which COOL is implemented may have an important influence on consumer purchases. For example, should fish caught in the Gulf of Mexico, but processed in Mexico, be labeled of U.S. or Mexican origin? Similarly, consumers may not be concerned with whether a steer was raised in Canada as long as it was processed in the United States. Interestingly, Verlegh and Steenkamp found in their meta-analysis that the country-of-origin effect was similar for hybrid products and products that are fully produced in one country.
Implications for Public Policy
Questions remain regarding the costs and benefits of the COOL policy included in the most recent farm bill; questions that will only be fully answered when the entire program is implemented. Most economists believe that free markets generate the maximum obtainable societal welfare. Exceptions occur for market failures, the most common of which include the presence of imperfect information, market power, and/or externalities. The latter are rarely mentioned as a motivation for the federal government to enact COOL. A few producer groups have argued that COOL will serve to counteract market power of packers and retailers by providing U.S. producers with a specialized asset in limited supply (e.g., U.S. grown products). However, such an argument is tenuous at best, because no mechanism was implemented with the policy to control supply within the United States; and if the real concern was market power, more direct and efficient remedies exist to resolve that market failure. That leaves the asymmetric information problem, which may indeed exist if origin is important to consumers, and this information is not available at the point of purchase. Labeling is the classic solution to asymmetric information. Whether voluntary or mandatory labeling is the desired solution depends on consumer preferences for origin. The stronger the preferences for origin, the more favorable the mandatory labeling becomes.
The purpose of this comment was to note that agricultural economists have access to a large body of literature on country-of-origin effects. The question is whether this literature sheds light on our understanding of the consequences of the present policy. We believe it does. In particular, the marketing literature explicitly acknowledges that preference for origin stems from issues dealing with product quality and ethnocentrism. Several studies have estimated consumer willingness-to-pay for agricultural products with U.S. labels, and most indicate significant and positive valuations;2 however, such studies have done little to identify the antecedents of this value.
If estimated willingness-to-pay from these studies primarily relates to consumer preference for product quality, more research is needed to identify the quality attribute(s) for which COOL is serving as a proxy. For example, Wimberley et al. found that 80% of U.S. consumers believed that food produced or raised in the United States is fresher and safer than imported food. This indicates that a more efficient labeling system could be generated by providing information on the attributes that are truly of interest (e.g., freshness or safety), without introducing additional costs that involve segregating attributes of less interest. Knowledge of the quality attributes, which COOL identifies, would also help identify whether consumers have misperceptions about the quality of foreign products, which might need correction. Such knowledge would also aid, for example, in deciding whether a product should be labeled as to its origin of production or processing.
As opposed to product quality issues, however, ethnocentrism may primarily be driving valuations for COOL. If so, individuals prefer U.S. products primarily due to protectionist sentiments. It would not be surprising to find that much of consumers' valuations for COOL are indeed derived from such preferences as evidenced by data from Mayda and Rodrik, which indicated over 60% of U.S. citizens have antitrade views. Mayda and Rodrik showed that antitrade views were strongly associated with nationalism/patriotism, which is the underlying cause for ethnocentrism.
Ethnocentristic motivations for COOL pose a challenge to identifying the welfare effects of a policy. First, to the extent that the majority of citizens desire protectionist measures, there are more efficient and direct ways than labeling to achieve such outcomes. Second, despite the apparent fact that most of the U.S. population have antitrade views, economists generally agree that freer trade is welfare-enhancing. Thus, a labeling policy that effectively serves as a protectionist measure is almost certain to harm societal welfare. Indeed, it is one thing for the federal government to support a policy that primarily solves an asymmetric information problem, but an entirely different matter for the government to support a protectionist measure, at least in terms of aggregate societal welfare.
One might argue that if COOL is primarily demanded for ethnocentric reasons, the market is the place for these preferences to be expressed via firms voluntarily providing what consumers desire. The fact that country-of-origin effects have been studied so extensively in the business and marketing literature suggests that the private sector has ample ability to provide origin cues when it is profitable; again assuming that consumers can trust these private signals. Another view is that ethnocentric preferences should be included in estimates of consumer demand in trade models, even if foreign and domestic products are identical in terms of all objective physical characteristics. This view also suggests that these altered demand curves can generate greater societal welfare domestically even if the root cause is protectionism. However, consumers acting on ethnocentrism may generate externalities for themselves and others by preventing the full realization of gains to trade.
Finally, we note that ethnocentrism and perceptions of product quality are intertwined. Studies such as Umberger et al. (2003b) and Loureiro and Umberger (2005) indicate that consumers believe U.S. beef is safer than foreign beef and that U.S. beef is higher valued because of preferences for safety. The marketing and psychology literature imply that patriotism and ethnocentristic tendencies can bias perceptions of product quality. Does U.S. beef actually taste better? Is U.S. beef actually safer? When ethnocentrism and quality perceptions interact, origin labels can override and even bias perceptions of quality. Ethnocentrism may cause an individual to believe that U.S. products are safer and taste better. If this is true, estimated benefits of mandatory COOL would be based on misperceptions rather than objective quality differences, which would condemn the merits of the policy. It would even call into question the appropriateness of voluntary labels. However, some marketing and neurological researches (e.g., Hine, McClure et al.) suggest that certain extrinsic cues such as color and brand can actually alter taste. For example, McClure et al. showed similar neural activity when individuals participated in blind taste tests of Coke and Pepsi; however, when the brands were made known, tasting Coke sparked much greater neural activity than tasting Pepsi. Thus, a COOL label, rather than biasing quality perceptions, might actually create quality.
We do not claim to know the primary motivations behind consumer preferences for COOL. However, more research is needed to fully understand the consequences of mandatory COOL. For example, what fraction of the estimated premium for U.S. products is due to ethnocentrism versus perceived quality? How should ethnocentristic preferences be treated in models of trade, and do such preferences generate externalities by limiting gains from trade? Are U.S. products actually safer and better tasting than foreign products? Do origin cues generate misperceptions of quality, or do they actually create additional value for consumers? We do not have answers to these questions, but we look forward to investigating these issues in the future.
