How Do Nutritional Warning Labels Affect Prices?

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Across the globe, over one billion individuals—including 650 million adults, 340 million teenagers, and 39 million children—are considered obese (World Health Organization 2022). This number is still rising, and with dangerous expected outcomes. According to the World Health Organization, by 2025, 167 million adults and children will have worsening health due to being overweight or obese. Consequently, regulatory bodies around the world are working to combat this issue. Professors Max J. Pachali, Marco J.W. Kotschedoff, Arjen van Lin, Bart J. Bronnenberg, and Erica van Herpen study such a regulation in Chile to develop a model that sheds light on the impact of warning labels on cereal prices. Their Journal of Marketing Research study reveals a fascinating trend: Labeled cereals experience price hikes, while unlabeled products either witness a decrease in price or only marginal price increases. This intriguing finding presents compelling evidence that price-sensitive consumers remain within the unlabeled product category.

In 2016, Chile took a pioneering step by becoming the first country to enforce a mandatory, nationwide policy requiring nutrient warning labels on the front of product packaging (Taillie et al. 2021). Focusing on this crucial issue, the researchers delved deep into the multifaceted nature of the problem, with a particular emphasis on its impact on lower-income groups. Their study unveils the intricate dynamics between nutrition, economics, and consumer behavior, shedding light on a fascinating interplay. By peeling back the layers of this complex phenomenon, the article uncovers valuable insights that prove indispensable to both academic scholars and industry practitioners seeking a comprehensive understanding of how warning labels might influence pricing dynamics

Prices Align with Policymakers’ Intentions

The authors’ findings reveal an unexpected outcome in response to the warning label regulation: a price equilibrium that aligns with the objectives of policymakers. Notably, cereals deemed less healthy and labeled as such experience a significant loss in market share, whereas their healthier, unlabeled counterparts witness a substantial gain. In other words, firms increase the prices of unhealthier (labeled) products and drop or increase less the prices of healthier (unlabeled) products—a striking and perhaps unexpected pattern that is driven by the way different consumers respond to the warning labels.

Firms increase the prices of unhealthier (labeled) products and drop or increase less the prices of healthier (unlabeled) products—a striking and perhaps unexpected pattern that is driven by the way different consumers respond to the warning labels.

The adjustment of prices plays a pivotal role in this equilibrium. From a policymaker’s perspective, one of the most notable discoveries is the substantial impact of price changes on products with calorie and sugar labels. Furthermore, the study highlights that equilibrium price adjustments result in significant shifts in demand for unlabeled cereals. The research demonstrates that a mere .44% increase in market share for unlabeled cereals translates to a remarkable 12% of their total market share within the new equilibrium established post-regulation.

We had the privilege of conducting an insightful interview with the authors, who generously shared captivating perspectives on their research for this article. Brace for an extraordinary journey that unveils the covert strategies of the market, where labeled cereals encounter the daunting challenge of skyrocketing prices:

Q: Most research on nutrition labels in marketing has focused on changes in consumer behavior. What prompted you to study the effect of a warning label mandate on both consumer and manufacturer behavior?

A: The goal of the warning label regulation in Chile was to stimulate healthier product choices. In particular, policymakers targeted consumers with lower socioeconomic standards who often have less knowledge about a healthy diet and often have limited access to healthcare. However, the intended goal of the regulation may backfire if manufacturers responded by, for example, lowering the prices of labeled (unhealthier) products to compensate for the negative utility shock triggered by the warning label mandate. In this case, consumers with lower income (often more price sensitive) would face additional incentives to purchase unhealthier products. However, in our case, we find that the effect of the regulation is even amplified as more price-sensitive households updated more negatively on labeled products (referred to as a “composition effect” in the manuscript). Because of this, labeled cereals face a larger portion of less price-sensitive consumers than before, rationalizing raised prices after regulation. These price responses amplify the effect of the regulation as it becomes even more unattractive for low-income consumers to purchase unhealthy cereals. As the direction of price adjustments is usually unclear a priori, it is thus important to account for the supply-side’s adjustments of prices for judging the effectiveness of a public policy intervention, such as the warning label introduction in Chile.

Q: The U.S. is one of the countries with an obesity epidemic. Considering the cultural and socioeconomic differences between countries like the United States and Chile, do you think similar behavior would be encountered in the U.S.?

A: Our main finding that firms increased prices of unhealthier and labeled cereal products was derived using a structural model of optimal consumer and retailer behavior. Our findings thus provide guidance for predicting the likely direction of price adjustments in other markets if policymakers can, for example, anticipate which consumers will be most responsive to the introduction of warning labels: price sensitive (generally lower socioeconomic groups with lower income) versus less price sensitive (higher socioeconomic groups with higher income). To gain ex-ante knowledge of whether this might also be the case in a different market, policymakers could set up a choice experiment or conjoint analysis in their target population to investigate the likely price response. Thus, our results are generalizable beyond the Chilean case and may apply to countries like the United States as well.

Q: What do you think about consumer and manufacturer behavior across product categories? Cereal is a staple product, typically consumed daily, which makes the item (and consequently, the warning label) more salient. Do you think we would see similar effects across categories such as fast food, which people might consume outside the home and less frequently but with equally harmful consequences?

A: As other research shows (Araya et al. 2022), consumers may not respond as strongly to introducing warning labels in categories where they expect unhealthy products, such as chocolates and cookies. The reason is that labels only influence purchase behavior if consumers’ beliefs about the healthiness of products were biased before the label introduction. Thus, our findings may not be generalizable to categories in which consumers are already aware of the unhealthiness of products regarding sugar, calories, fat, or salt. We cannot therefore say with certainty that our findings would also apply to the fast food category. However, in other categories where the healthfulness of products is less clear for most consumers a priori, such as bread, we would expect similar price responses.

Q: What are your thoughts on products that were reformulated to avoid the warning labels? What characteristics would you say prompted certain firms to make the change while others did not?

A: Reformulations are an important aspect for judging the effect of the warning label regulation as well (see, e.g., Ale-Chile and Moshary 2022). We expect products that reformulated their recipe below the critical thresholds to avoid warning labels to benefit after regulation, similar to what we indicate for unlabeled products in the manuscript. However, most prominent product manufacturers with high market shares did not reformulate their product recipes in the cereal category for one-and-a-half years after the warning label regulation. The reason is that manufacturers are more hesitant to change the recipe of successful products in the marketplace. For most manufacturers, the price is the most flexible marketing-mix variable to adjust after a warning label introduction.

Q: Chile was the first country to implement nutritional warning labels. Was this a reason to choose Chile to study the effect of nutritional warning labels on price? In 2020, Mexico enacted a law requiring warning labels on the front of food packages that contain “excess” sugar, calories, sodium, or saturated fat. How do you think the findings of this study apply in Mexico?

A: Chile was one of the first countries that adopted a warning label regulation. We chose Chile because a mandatory regulation creates a clean setting to evaluate the effect of warning label introductions on consumer behavior and retailers’ price setting. As mentioned in our response to previous questions, the consumer composition effect may apply in Mexico as well, depending on which consumers will be most responsive to the introduction of warning labels—price sensitive (generally lower socioeconomic groups with lower income) versus less price sensitive (higher socioeconomic groups with higher income). Please also consider our previous answer on how policymakers can ex-ante test whether this is likely the case using, for example, conjoint analysis.

Q: Since price is one of the most flexible marketing mix elements to adjust, how do you think promotional offers will influence the relationship between nutritional warnings and price for both price-sensitive and non-price-sensitive consumers?

A: As suggested by our results, unlabeled products face a larger segment of more price-sensitive consumers than before regulation due to the consumer composition effect triggered by the warning label introduction. This suggests that these price-sensitive consumers that also pay attention to the healthfulness of their consumption would be very responsive to temporary price promotions of unlabeled products. On the other hand, labeled cereal products that face a more price-insensitive consumer clientele after regulation may have fewer incentives to put their products on price promotions. This would be a desirable side-effect of our results. However, we agree that this is a very interesting aspect that should be analyzed in future research.

Read the full article:

Max J. Pachali, Marco J.W. Kotschedoff, Arjen Van Lin, Bart J. Bronnenberg, and Erica Van Herpen (2022), “How Do Nutritional Warning Labels Affect Prices?” Journal of Marketing Research, 60 (1), 92–109. doi:10.1177/00222437221105014

References:

Alé-Chilet, Jorge and Sarah Moshary (2022), “Beyond Consumer Switching: Supply Responses to Food Packaging and Advertising Regulations,” Marketing Science, 41 (2), 243–70.

Araya, Sebastián, Andrés Elberg, Carlos Noton, and Daniel Schwartz (2022), “Identifying Food Labeling Effects on Consumer Behavior,” Marketing Science, 41 (5), 982–1003.

Taillie, Lindsey Smith, Maxime Bercholz, Barry Popkin, Marcela Reyes, M. Arantxa Colchero, and Camila Corvalán (2021), “Changes in Food Purchases after the Chilean Policies on Food Labelling, Marketing, and Sales in Schools: A Before and After Study,” The Lancet Planetary Health, 5 (8).

World Health Organization, “World Obesity Day 2022 – Accelerating Action To Stop Obesity,” World Health Organization, https://www.who.int/news/item/04-03-2022-world-obesity-day-2022-accelerating-action-to-stop-obesity.

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