Consumer choice of food products and the implications for price competition and government policy

In this paper we develop a random coefficients discrete choice model to investigate what affected consumer demand for prepared frozen meals from 1993 to 1998, when government regulation of nutrition labeling changed from voluntary to mandatory. The model links individual consumer characteristics (e.g., income, knowledge about nutrition, nutrition label use) to underlying product characteristics (e.g., price, nutritional attributes) and allows us to obtain preference parameters for each consumer as well as demand elasticities with regard to product characteristics for each product considered. We find that prices, advertising, price reductions, and consumer preferences for taste have a significant effect on the demand for prepared frozen meals whereas concerns and knowledge about nutrition and health do not. Using the estimated demand parameters we then evaluate price competition in the industry and the impact of the new mandatory labeling policy. The results show that collusive pricing behavior by manufacturers is not supported by our data and that the 30% margins in the industry are due to the exercise of unilateral market power and differentiation strategies. The results also show that consumer preferences and purchasing patterns within prepared frozen meals category did not change significantly after the implementation of mandatory nutrition labeling. [EconLit codes: Q130, L110, L150]. © 2001 John Wiley & Sons, Inc.