How Do Nutritional Warning Labels Affect Prices?

49 Pages Posted: 30 Jul 2020 Last revised: 4 Sep 2020

See all articles by Max J. Pachali

Max J. Pachali

Tilburg University - Tilburg University School of Economics and Management

Marco J.W. Kotschedoff

KU Leuven

Arjen van Lin

Tilburg University

Bart J. Bronnenberg

Tilburg University, CentER

Erica van Herpen

Wageningen University

Date Written: August 28, 2020

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

Suggested Citation

Pachali, Max J. and Kotschedoff, Marco J.W. and van Lin, Arjen and Bronnenberg, Bart J. and van Herpen, Erica, How Do Nutritional Warning Labels Affect Prices? (August 28, 2020). Available at SSRN: https://ssrn.com/abstract=3642756 or http://dx.doi.org/10.2139/ssrn.3642756

Max J. Pachali (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://sites.google.com/site/mjpachali/

Marco J.W. Kotschedoff

KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Arjen Van Lin

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Bart J. Bronnenberg

Tilburg University, CentER ( email )

Warandelaan 2
Tilburg, 5037 AB
Netherlands
+31 13 466 8939 (Phone)
+31 13 466 8354 (Fax)

Erica Van Herpen

Wageningen University ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

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