Waiting for the Invisible Hand: Market Power and Endogenous Information in the Modern Market for Food

WSU School of Economic Sciences Working Paper No. 2009-7

40 Pages Posted: 20 Feb 2009

See all articles by Trenton G. Smith

Trenton G. Smith

University of Otago

Hayley H. Chouinard

Washington State University - School of Economic Sciences

Philip R. Wandschneider

Washington State University - School of Economic Sciences

Date Written: February 19, 2009

Abstract

In many ways, the modern market for food exemplifies the economist's conception of perfect competition, with many buyers, many sellers, and a robust and dynamic marketplace. But over the course of the last century, the U.S. has witnessed a dramatic shift away from traditional diets and toward a diet comprised primarily of processed brand-name foods with deleterious long-term health effects. This, in turn, has generated increasingly urgent calls for policy interventions aimed at improving the quality of the American diet. In this paper, we ask whether the current state of affairs represents a market failure, and-if so-what might be done about it. We review evidence that most of the nutritional deficiencies associated with today's processed foods were unknown to nutrition science at the time these products were introduced, promoted, and adopted by American consumers. Today more is known about the nutritional implications of various processing technologies, but a number of forces-including consumer habits, costly information, and the market power associated with both existing brands and scale economies-are working in concert to maintain the status quo. We argue that while the current brand-based industrial food system (adopted and maintained historically as a means of preventing competition from small producers) has its advantages, the time may have come to consider expanding the system of quality grading employed in commodity markets into the retail market for food.

Keywords: credence goods, history, food policy, certification

JEL Classification: D23, D83, I18, Q18

Suggested Citation

Smith, Trenton G. and Chouinard, Hayley H. and Wandschneider, Philip R., Waiting for the Invisible Hand: Market Power and Endogenous Information in the Modern Market for Food (February 19, 2009). WSU School of Economic Sciences Working Paper No. 2009-7. Available at SSRN: https://ssrn.com/abstract=1346650 or http://dx.doi.org/10.2139/ssrn.1346650

Trenton G. Smith (Contact Author)

University of Otago ( email )

PO Box 56
Dunedin
New Zealand

HOME PAGE: http://www.business.otago.ac.nz/econ/staff/smith.html

Hayley H. Chouinard

Washington State University - School of Economic Sciences ( email )

P.O. Box 646210
Pullman, WA 99164
United States
(509) 335-8739 (Phone)
(509) 335-1173 (Fax)

HOME PAGE: http://www.ses.wsu.edu/PDFFiles/FacultyVita/hayleycv_1_2007_SES.pdf

Philip R. Wandschneider

Washington State University - School of Economic Sciences ( email )

P.O. Box 646210
Hulbert Hall 101
Pullman, WA 99164-6210
United States

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