How Do Nutritional Warning Labels Affect Prices?
Posted: 30 Jul 2020 Last revised: 18 May 2022
Date Written: May 17, 2022
Obesity is increasing worldwide and in many countries, the problem is particularly serious among lower income groups. To fight obesity, 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 equilibrium price changes in response to consumers’ 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. The authors develop a model which shows that warning labels lead to higher prices of labeled cereals, as is also observed in data. In contrast, prices of unlabeled products tend to drop or at least increase less, incentivizing price sensitive consumers to remain in the category. The authors decompose post-labeling market share adjustments into a pure label effect that fixes prices at initial levels after regulation and a total effect that accounts for price re-optimizations. Their 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 choose healthier alternatives.
Keywords: warning labels, equilibrium price adjustments, market segmentation, product differentiation
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