53 Pages Posted: 13 Aug 2018
Date Written: June 25, 2018
Even simple goods have many dimensions of quality. For example, milk has over 90 dimensions of nutritional quality acknowledged by the USDA. However, few dimensions can feasibly be represented in market exchange. Consumers select goods based on a small number of observables, which may include attributes of the firm. Innovation makes production functions more flexible, and can alter the relationship between these observables and hidden quality, which is increasingly valued as incomes rise. When innovation deteriorates hidden quality and has fixed costs, consumers may prefer buying from small firms, or seek attributes correlated with non innovative production. This can explain rising demand for antiquated modes of production (such as local, unpasteurized, non-GMO) among many goods that were once considered commodities (e.g., milk, eggs). As production scales to meet demand, it can alter the correlation with hidden quality, and cause demand to shift to a new observable. This can explain why demand appears to follow fads, for example why demand shifted from organic to local production following the development of the national organic standard in 2002. I show that the past century of innovation has exposed hidden tradeoffs in wheat. I find that health experts are substantially more likely to consume milk with emerging labels, using household scanner data. I also present results from a choice experiment.
Keywords: quality, innovation, asymmetric information, food, health
JEL Classification: L15, D82, I12
Suggested Citation: Suggested Citation