How Do Nutritional Warning Labels Affect Prices?

Abstract

Obesity is increasing worldwide and the problem is particularly serious among lower income groups. Front-of-pack nutritional warning labels are a prominent regulatory tool that have been implemented or are currently debated in many countries. Existing studies document that warning labels incentivize consumers to substitute away from unhealthy products. However, not much is known about manufacturers’ price reoptimizations in response to consumers’ (dis-)utility for warning labels. Using household purchase data in the cereal category, this paper studies the adjustments of prices after the mandatory introduction of warning labels in Chile. We show that warning labels lead to higher prices of labeled cereals because of a segmentation effect and because of increased product differentiation. In contrast, prices of unlabeled products tend to drop or at least increase less, incentivizing price sensitive consumers to remain in the category. We decompose post-labeling market share adjustments into a direct effect that fixes prices at initial levels after regulation and a total effect that accounts for price reoptimizations. Our findings point to self-enforcing effects of a warning label regulation as the price adjustments amplify the policy maker’s goal of reducing unhealthy nutritional intake, especially because market forces incentivize low-income segments to consider healthier alternatives as well.

Keywords: warning labels, equilibrium price adjustments, market segmentation, product differentiation