Three Essays on Quality Differentiation

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Title: Three Essays on Quality Differentiation
Author: Ferrier, Peyton Michael
Advisors: Charles R. Knoeber, Committee Member
Walter N. Thurman, Committee Co-Chair
Russell L. Lamb, Committee Co-Chair
Nicholas E. Piggott, Committee Member
Abstract: This dissertation includes three essays that consider the role of quality variation within agricultural production when consumers are heterogeneous in their preferences for quality. The first essay, 'The Welfare Benefits of USDA Beef Quality Certification Programs,' estimates the consumer welfare benefits from the increase in scope of USDA beef quality certification programs in the 1990's. Between 1975 and 1999, beef demand fell by 66% (Marsh, 2003) and its share of the overall meat market fell from 48% to 32%. Along with changing consumer preferences and heightened health consciousness, poor quality assurance has been offered as a reason for the decline. Certification programs provide producers a new way to differentiate and brand products as being of higher quality outside the USDA grading program. Between 1994 and 2002, the share of all commercial cattle that are certified rose from 4% to 12% and the share that are both certified and qualify as upper Choice rose from 3% to 8%. An Inverse Generalized Almost Ideal Demand System (IGAIDS) is estimated using weekly data on beef consumption by grade, branded beef, chicken and pork. It is found that the increase in branded beef supplies in 1990's increased consumer welfare by approximately 2% of beef expenditure. The second essay, 'Grading and Quality Certification in Beef Production,' presents an equilibrium model of demand and production where output qualities are distinguished by quality grade and whether the product is certified. Simulations are used to demonstrate that the entry and exit of producers from the industry eliminates profits and losses of producers over the long run. Comparative statics and simulations also demonstrate that the size and distribution of total welfare are affected by the number of grades and the placement of grade standards. An overview of the USDA beef quality grading and certification programs is provided and related to the model. The third essay, 'When is Fruit Bundling Fruitless' Sorting, Bundling and Disposal When Quality Information is Asymmetric,' considers the conditions in which sellers allow sorting and discourage it through mechanisms such as bundling. Agricultural goods often vary in quality even when goods are sold at a single price which encourages consumers to sort goods. Consumers can increase their individual gains from trade from sorting but cannot create any new benefits from sorting in aggregate. To eliminate this cost, sellers discourage consumer sorting through marketing mechanisms such as bundling goods. Alternatively, sellers may still allow consumer sorting if quality preferences are such that sorting reduces the price sensitivity of marginal consumers. In this process, consumers with weaker preferences for quality receive higher quality goods in a process introduced as quality discrimination. This essay also shows that sellers may allow sorting to improve expected quality if they intend to dispose of, rather than sell, a portion of their product.
Date: 2004-08-30
Degree: PhD
Discipline: Economics

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