The Value of Organic Certification to Consumers
Organic certification is considered to be an important form of distinguishing snacks and produce to ensure that consumers are receiving products that satisfy certain standards, with many American consumers willing to pay up to 116% of the market price for an organic product. Organic farming practices claim to use limited synthetic pesticides and adopt sustainable practices, but these measures are often very costly and haven’t been shown to have clear, observable benefits compared to their non-organic counterparts. The National Organic Program is the overseer of information regarding organic certification, but does organic certification solve the problem of asymmetric information?
Dan Yu, a PhD candidate at the University of Minnesota, has written a research paper titled "The Value of Certification to Consumers: Evidence from the U.S. Organic Food Market" to see if third-party certification improves the sustainability of organic food production. In July 2023, she will join the University of Alberta as an assistant professor and the co-operative chair in agricultural marketing and business. Check out Dan's webpage for more information on her research and career.
Why did you choose to study organic certification on produce and what was your goal with your research?
Consumers today are getting more aware of certain production processes or inputs that are costly but socially or environmentally beneficial. While some consumers may value them enough to be willing to pay a price premium, these desired attributes are usually not perceptible even after consumption. In this case, third-party certification is often used to provide a type of confirmation of certain product characteristics through external review, assessment, and audit.
My research studies the value of third-party certification in the context of the US organic food market in terms of (a) how informative the organic certification is, (b) how much consumers are willing to pay for organic products compared to conventional ones, and (c) the welfare effects of the organic certification program.
What did you discover during your research process?
a. The extent of informativeness of organic certification varies by product type. Take eggs and breakfast cereal out of the 15 product types studied in the paper, for example. Organic and conventional eggs do not differ in their appearance, so consumers may be able to acquire more information from the organic certification. For breakfast cereal, some characteristics, such as certain ingredients, may inform consumers about the same thing or part of what the organic seal would inform.
b. The willingness to pay (WTP) associated with organic certification varies by product type, ranging from 4% to 116% of the price of conventional counterparts. The WTP is also positively correlated with the informativeness of the certification, meaning that consumers are willing to pay more for organic products when the certification is more informative. Going back to the eggs and breakfast cereal example, consumers are willing to pay 116% more for organic eggs but only 18% more for organic cereal compared to their conventional counterparts.
c. From counterfactual analysis, I find a potential welfare loss in response to removing the organic certification program. In 2018, the potential welfare loss from the eggs market alone is worth more than 40% of the total administrative cost of the certification program.
Did the results of your research align with your initial hypothesis?
Most results of my research qualitatively align with my initial hypothesis.
Based on your research, do you believe that organic certification needs to be reevaluated?
My research provides evidence of the potential welfare benefits of organic certification programs from the market perspective. The welfare benefits of the certification are most likely to be larger than its administrative costs. Moreover, to evaluate the certification, one should also take into consideration the potential externality of organic agriculture, such as healthier soil, improved biodiversity in agroecosystems, and restriction on the use of antibiotics in livestock.
What do you hope to see in future research regarding organic certification and verification?
Regarding organic certification or certification in general, it is worth studying (a) the welfare effects of organic certification through firms’ investment decisions and products’ entry and exit and (b) how the introduction of certification affects the evolution of organic agriculture technology in terms of cost reduction, resource availability, and synergy effect.