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Do Consumers Trust the National Inspection Exemption Brands? Evidence from Infant Formula in China

Listed author(s):
  • Jin, Yanhong H.
  • Lin, Liguo
  • Yao, Lan

Consumers are often uncertain about product quality and have to rely on different information, either given or pursued, to assess quality. Developing countries may lack institutional and technical resources to rigorously monitor and enforce product quality standards and/or to implement market-based instruments where market failures are common. The information-based instruments on product quality may work well in these countries as they reduce information asymmetry between firms and consumers. This study investigates one particular information-based instrument, the National Inspection Exemption (NIE) system in China. China launched the National Inspection Exemption (NIE) System in various industries in 2000 to award firms who are in compliance with the quality standards, to inform consumers of product quality, and to lessen the pressure on regulatory monitoring and enforcement of product quality standards. Once a firm is granted the NIE title by China's National Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), its products are exempted from quality inspections by all governmental agencies at different levels for three years; but it is obligated to report the product quality condition to the local AQSIQ office annually. The NIE titled firms are also allowed to include the title in the product label and to use the status in the advertisement campaign. Based on the theoretical framework, we establish the hypothesis that consumers are more willing to buy the product with the NIE title and the NIE title is likely to increase sales revenue when consumers lack of means to assess quality. The empirical application of China dairy industry supports the theoretical hypothesis. In particular, using the firm-level panel data, we find that the NIE title boots sales revenue and the impact is both statistically and economically significant based on the difference-in-difference estimate and the random-fixed effect estimations. Furthermore, using the survey data collected right after the 2008 China milk scandal regarding the brand choice of infant formula among 1,228 mothers with infants and young children, we find that consumers’ preference for the NIE title still present even the NIE titled firms are involved in a food scare event. The positive NIE preference is particularly strong among highly educated consumers and those who buy domestic brands.

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File URL: http://purl.umn.edu/103766
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Paper provided by Agricultural and Applied Economics Association in its series 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania with number 103766.

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Date of creation: May 2011
Handle: RePEc:ags:aaea11:103766
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  1. Dong, Fengxia, 2005. "Outlook for Asian Dairy Markets: The Role of Demographics, Income, and Prices," Staff General Research Papers Archive 12379, Iowa State University, Department of Economics.
  2. Frank H. Fuller & John C. Beghin & Scott Rozelle, 2004. "Urban Demand for Dairy Products in China: Evidence from New Survey Data," Center for Agricultural and Rural Development (CARD) Publications 04-wp380, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. Tülin Erdem & Michael P. Keane & Baohong Sun, 2008. "A Dynamic Model of Brand Choice When Price and Advertising Signal Product Quality," Marketing Science, INFORMS, vol. 27(6), pages 1111-1125, 11-12.
  4. Bai, Junfei & Wahl, Thomas I. & McCluskey, Jill J., 2008. "Fluid milk consumption in urban Qingdao, China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(2), June.
  5. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
  6. Yanhong H. Jin & David Zilberman & Amir Heiman, 2008. "Choosing Brands: Fresh Produce versus Other Products," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 463-475.
  7. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
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