Quality of Consumers Goods

Quality of Consumers Goods In recent years, consumers are becoming increasingly conscious about the quality, safety, suitability and environmental impacts of the goods that they demand. However, in many cases, consumers would not aware of the quality of a goods or products even after consumptions. These products are known as the credence goods. It is difficult to distinguish between two qualities of the same good, even after consumption. In such case, consumers are willing to pay a premium for the hidden attributes of the goods that they cannot observe. Such goods include ‘natural versus genetically modified (GM) food, ‘organic versus non-organic products, ‘fair-trade products, ‘suitable for vegetarians goods, ‘Kosher, and more generally ‘high-quality versus low-quality products. However, this paper is interested to study a special type of credence goods, that is ‘Halal versus non-Halal products or goods. Halal is an Arabic word which means lawful or permissible. It follows the Islamic ruling known as the Syariah law. Halal covers every aspect of Muslims life especially dietary. Halal food simply means that the food products are free from any elements which Muslims prohibited from consuming. Extended discussion on Halal is presented in Chapter 2. With Islam as the second largest religion in the world and the fastest growing, the world Halal food trade is estimated to be around US$ 150 billion to US$ 500 billion in 2007 on which US$ 80 billion alone is generated from agri-food products (Agriculture and Agri-food Canada, 2007; Brunei Halal, 2007). These factors hasten the investment in Halal products, and in some cases, producers cheat for easy access to the market. Analysis of Halal in this paper, distinguishes itself from other studies on credence goods, as it involves different levels of consumers interactions. Any credence goods, including Halal products, comprise a special attribute or characteristic. This characteristic is not verifiable and revealed unless by experts or other professional services. Hahn (2004) suggested that real or complete credence goods would be difficult to find as consumers would have some judgement on products or services after the consumption. This is not entirely true as in case of Halal food product, especially Halal meat. It is very difficult to check if the meat is entirely Halal as claimed, as there is no existing way to check after consumption whether say the meat purchased is really slaughtered in Syariah methods, even though there is non-existence of other non-Halal ingredients. Therefore, in this sense, Halal meat is an example of a real credence good. In many cases, consumers concern for the special or credence attribute (eg. environmental, fair-trade, organic, Halal, etc.) is evidenced by their willingness to pay a premium for the high-quality products. The willingness to pay opens up an opportunity for low-quality producers (those which lack the special attribute) to take advantage by pretending to be that of high-quality, especially when only the producers know whether the desirable attribute exist in their products or not. Moreover, it is too expensive for individual consumer to directly monitor or verify these attributes. Therefore, consumers could only decide their purchasing choice on subjective belief regarding the products quality, which are based on all available information such as press report, word-of-mouth and labels when such adverse selection in credence goods market exist. Hence, producers cannot build reputation when production of low-quality imitating goods could not be detected and punished. Delayed detection of low-quality products allows its producers to imitate the strategy of their high-quality rivals, which hampered signalling use. Like other credence goods, Halal food products, through certified Halal brand/logo would improve the information asymmetry, but may carry the similar issues. These issues are discussed in Chapter 2. It is common for credence goods to feature a communication scheme such as labels or brands to help consumers in making purchasing decisions. Moreover, these labels or brands often require authentication by legislator or a third-party organisations that have the proficiency in each field of specific credence quality attributes, thus involving additional costs. In the Halal market, there also exist regulations by the government (eg. in Brunei, under the authority of Brunei Islamic Religious Council, Ministry of Religious Affairs) or third party organisation (eg. in United Kingdom, by Halal Monitoring Committee and Halal Food Authority, to name some). In which they certify a product through monitoring and indicating some guidelines for producers before granting a recognisable label on the products. Hence, this label helps consumers to make better decision choice. Moreover, a quality label that improves pre-purchasing information would increase welfare, and high-quality producers would always be willing to go through the necessary inspection as to reveal the products quality to the consumers, unless the cost for verification is extremely high. The welfare affect of introducing Halal labelling is briefly discussed in the analysis, especially where Halal labelling opens up an opportunity to access additional consumers, ie. Muslims, also referre d to the primary consumers. The analysis of Halal in this paper is aimed to study the interactions of the market forces or what commonly referred to in economics as ‘invisible hand of the demand and supply in Halal market. At the same time, considering the effects on introduction of labelling upon the level of equilibrium, in addition to other factors such as the additional demand by Muslims of primary market. This is a unique or special aspect which might not be available in previous studies on credence goods. The following chapters are organised as follows. Halal concept is further discussed in the next Chapter 2. This chapter is intended as an expansion to the introduction (Chapter 1) in order to provide a deeper understanding on the concept of Halal, and to provide information regarding the current market for Halal food products and the issues pertaining in the Halal market on the use of Halal logo. The relevant literature reviews are discussed in Chapter 3, discussing the works by other authors on the area of credence goods which can be linked to Halal. Chapter 4 presents the economic analysis and application of Halal products as credence goods. Chapter 5 concludes this paper and provide a discussion on the policy implications generated by the study. CHAPTER 2 2.0. A Brief Concept of Halal Religion involves beliefs and the way of life, where group of individuals interprets and respond to what they feel is supernatural and holy (Johnstones, 1975, in Shafie and Othman, n.d.). Shafie and Othman underline that most religion prescribes or prohibits certain behaviour including that of consumption (n.d.). The concept of Halal is not new in the Islamic world, but only in recent years that its potentials have been realised by corporations and organisations around the world, which normally perform under the conventional economics. The word Halal comes from Arabic which means permissible or lawful. It is ruled by the Islamic law known as Syariah law which is based on the Quran and Hadith (records of the life, actions and teachings of Prophet Muhammad). By not fully understanding the concept of Halal, one (non-Muslim especially in Muslim-minority country such as United Kingdom) may think that Halal only refers to meat or something to do with ‘kebabs. Halal actually governs every aspect of life of Muslims, however, this paper only view Halal perspective on consumption of food. What is not Halal is called Haram or non-permissible. Any product which comes from swine and/or dog is strictly Haram. A special cleansing ritual must be done if a Muslim directly touched (although accidentally) these animals and/or the sources (eg. skin). Such products that contain strictly Haram ingredients or derivatives are termed as ‘non-transformable in the analysis in Chapter 4. Amongst other strictly Haram animal products include blood, birds of prey, and/or carrion (dead animals without slaughtering). Alcohol is also Haram, but in some strict case it could become or change into Halal, this is discussed later on in Section 2.3 of this paper. Un-slaughtered animals such as beef and chicken are also become non-Halal, unless slaughtered by a Muslim according to Syariah practice. Such products are termed as ‘transformable in the analysis of this paper. What lies between Halal and Haram is called Mashbooh meaning that the goods appear to be suspicious, questionable and According to Bonne and Verbeke (2007), as product attribute, Halal refers to the nature, origin and the processing methods of the food products, which entails similarity with organic foods and those taking animal welfare or sustainability into account. Strict procedure must be followed to obtain highest standard of Halal, and that Halal products must not contact with non-Halal products; as similar to vegetarian food should not be in contact with any meat. Halal concept covers both food and non-food product category, but as mentioned earlier, this paper would only focus on the first one. Studies show that about 70 to 75 percent of Muslim strictly follows the Halal standard for their dietary (Hussaini 1993a in Bonne and Verbeke, 2007; Minkus-McKenna, 2007). The next section provides an overview of Halal food market. 2.1. Halal Food Market The Halal market is considered as the fastest growing market globally as reported by the Borneo Bulletin (2008). The world Halal industry is estimated to worth between US$ 500 million to around US$ 2 trillion (Agriculture and Agri-food Canada, 2007; Borneo Bulletin, 2008; Brunei Halal, 2007). The market is growing around US$ 500 billion annually due to the rising Muslim population worldwide (Borneo Bulletin, 2008; Brunei Halal, 2007). It is reported that the Muslim population is known to be the fastest growing religion in the world (Bonne and Verbeke, 2007) and in Europe (BBC News, 2005). The global Halal food trade itself in 2007 is estimated to be between US$ 150 billion (Brunei Halal, 2007) and US$500 billion with 12 percent of this or US$ 80 billion generated from agri-food products (Agriculture and Agri-food Canada, 2007). In addition, Islam is the second largest religion in the world (Riaz and Chaudry, 2004) with nearly 1.5 billion people (ibid.; Bonne and Verbeke, 2007; Din, 2006). The National Statistics Census carried out by the British Government, shows that Islam is also the second largest religion in the United Kingdom, approximately 1.6 million Muslims (2001). The statistics also revealed that Muslims are the largest household in the United Kingdom. These factors would justify that the demand for Halal food products in the United Kingdom is expanding. The market for Halal can be divided into two namely, primary and secondary. Primary market arises from the demand by Muslims, whereas, secondary market refers to the demand by non-Muslims. These terms are used in the analysis of this paper. Agriculture and Agri-food Canada (2007) suggested that Halal is often referred to safety and of high quality by both markets. Besides these, factors for increasing Halal demand includes: increasing incomes in primary market, rising population of Muslim, and rising demand for variety in primary market (ibid.). For Muslims, consuming Halal food products are their religious obligation, however it is known that Halal food are also consumed by non-Muslims. The later often perceived as specially selected and processed to achieve highest standards of quality (Riaz and Chaudry, 2004, p. 14). Manufacturers or producers that sells Halal products would create significant advantage compared to those that do not (Shafie and Othman, n.d.). Riaz and Chaudry (2004, p. 16) suggested that the increasing demand for Halal products as well as expanding number of Muslim population can be an inducement for producers to provide Halal products. Nonetheless, it is safe to say that these views mostly look at Muslim-majority economies such as those in Asian region. Hence, this paper provides a study in relation to Muslim-minority economy such as the United Kingdom. However, like any other food labels, Halal labelling also have some issues. 2.2. Halal Logo and Its Issues The use of Halal logo in food products indicates that the products are Islamic or Syariah compliant. Similar to other food related logos such as ‘suitable for vegetarian V-logo, Halal logo intends to communicate with the consumers of this product that it is fit for their consumption. Initial finding shows that some companies may use this logo even though its products might violate some rules of the Syariah law. Such situation was reported in which, some meat and other processed products from Brazil imported into the country, were being inspected by Halal Monitoring Committee, to be found a violation (2007). Another comparable situation is reported by The Tribune (2008) that the biggest meat producer in Scotland is under investigation over the supply of so-called ‘fake Halal meat in the country. There are some issues to which cause the problem arises. Fischer claims that the lack of a state body that is capable of inspecting the unregulated market [in the United Kingdom] has left this market open to fraud, corruption and without any kind of standards, uniform certification and standard (n.d.). Study by Fischer also shows that many British Muslims and organisations call upon the state to help recognise and standardised Halal. However for the ease of this papers analysis, this situation is relaxed, meaning producers behave honestly when claiming their products as Halal. Having Halal logo does not mean the products automatically accepted to be purchased by consumers especially that of primary market. Research undertaken by a university in the United Kingdom, shows that consumers prefer small shops when buying Halal meat, rather than buying from supermarkets, due to factors mentioned earlier and others including lack of marketing of Halal food (Anonymous, 2006). Like any other goods, the credence of Halal food products has to be clearly communicated such as indication on pack or on-label (Bonne and Verbeke, 2007), in addition to conventional marketing strategies, for example advertising. Moreover, this would add some utility value to the consumer and useful in the purchasing decision (ibid.). Nonetheless, to make the analysis of this paper simple, having Halal labelling is enough to induce greater demand and consumptions. 2.3. Issues of Alcohol Alcohol is clearly not permissible, however it is essential for certain industry processes and religious scholars are aware of this — some of them suggested that some use of alcohol may be acceptable as long as it is evaporated and not exist in the final products (Riaz and Chaudry, 2004). However, if there is an alternative to alcohol for such process, it would be preferred, as majority of Muslims would avoid products that use alcohol at any stage. It is generally known by Muslims that wine (a Haram state product) which turns ‘naturally into vinegar thus the vinegar is considered as Halal. This situation is called Istihala or ‘change of state or properties. A reverse situation as such that, if wine is added to Halal food, as in common cooking practise in the Western, hence the food becomes Haram. However, this issue is not represented in the analysis, for simplicity argument. It is clear that Halal can be perceived as a credence attribute, although there are numero us literatures on credence goods, only few actually discussed in relation to Halal products. Next chapter will discuss the literatures on credence products. CHAPTER 3 3.0. Literature Review This chapter is divided into five interrelated parts or sections. The first section provides a (general) glance on the studies or literatures on credence goods, which is applicable in the study of the market for Halal products. This is followed by the second section, of discussions on the demand for such goods. Market failure arises due to the nature of credence goods, which is discussed in the third section of this chapter. In the fourth section, a review on the solution of the market failure problem is examined. The final section deals with the issue pertaining to some of these solutions. 3.1. Credence Goods at a Glance There are growing numbers of literatures on credence goods attribute since it was first mentioned by Darby and Karni in 1973. These literatures involve different assumptions which produce diverse outcomes. However, it is difficult to find economic literature that deals directly with Halal subject as a credence good. Nonetheless, studies on some of the credence goods can be applied to Halal concept. Most literatures on credence goods assume that consumers are homogeneous. Hahn (2004) showed the contrast to this, in which the author grouped the consumers into two namely those who have some expertise or informed and those who do not or uninformed; This paper is slightly differs from that of Hahn (2004), where the consumers in this paper are also divided into two, namely Muslims (those who only consume Halal goods, or primary consumers) and non-Muslims. The latter is further grouped into two, ie. conventional consumers—who only consume non-Halal; and secondary consumers—who prefer to consume Halal products. Some economists (such as McCluskey, 2000; Cho and Hooker, 2002) used game theory models on credence attribute to assess the interplays of stakeholders. These include whether producers decide to claim their products as those of high quality, then they have to decide whether to produce according to the claims or not. However, the use of game theory is out of the scope of this papers analysis. Nonetheless, producers are assumed to produce what they intended to, without dishonesty. Economists divide consumers perception of food quality into a three attributes, namely: search, experience (which were pioneered by Nelson in 1970) and credence attribute (in Darby and Karni, 1973; Innes et. al., 2007; Umberger et. al., 2008). Search attributes can be determined from pre-consumption and at point of purchase such as colour, shape, brand and freshness. Experience attributes, arise from taste, juiciness, and food safety which could only be determined during or after consumption. Lastly, credence attributes refer to the process and production aspects, which the author claims that it cannot be determined before, during or after consumption of that particular food product (Umberger et. al., 2008). These food products, especially Halal as credence goods emphasise and maintain a strict quality attributes, and failure to maintain this would result a loss in its credibility, hence would brings disutility to the consumers or reduction of welfare. Some economists such as Caswell and Mojduszka (1996, in Cho and Hooker, 2002) argued that by providing information as policy tool, credence attributes could be transformed into search attributes. However, this would require a strict environment where system of information provided is perfect and fraud could not taken place — these are less likely to be a (current) scenario of the real world. Nonetheless, this concept is used in the analysis of this paper, for simplicity reason. On the other hand, Cho and Hooker (2002) mentioned that credence goods could act like a (lagged) experience goods if they involve time duration for detection of risk (relatively quickly), eg. infected food, vice versa. Like any production or supply of consumer goods, it depends on the demand for such goods, for an equilibrium to exist in the market. The following section discusses the determinants of demand for credence goods. 3.2. Consumer Demand for Credence Attribute Individuals would consume goods or services that yields highest utility or satisfaction level and presumed to make rational choice. However, this is subject to physical (ie. how much they can consume) and economic (ie. budget) constraint that limits the consumers choices (Mas-Colell et. al., 1995). Moreover, the preference-based approach to consumer demand is of critical importance for welfare analysis in which, without it, evaluating the consumers level of well-being would have no meaning (ibid.). Dulleck and Kerschbamer (2001) identified credence characteristics in terms of utility, in which although consumers can observe the utility derived from consumption of such goods ex post, they are not sure if the utility they get is the ex ante needed one. However, in the analysis of this paper, the utility is considered in terms of welfare level obtained from consumers and producers surplus. In addition to the conventional determinants for demand such as income, taste and preference, consumer characteristics and quality attribute become increasingly important factors nowadays. According to Antle (1999, in Senauer, 2001, p. 4), the new economics is more concerned with the markets for ‘quality-differentiated products in which the author presented a stylised demand function which include quality factors (non-price attribute): X = D (P, I, N, C, Q) Where X depends on price and other goods (P), income (I), number of population (N), characteristics of the population/consumer (C), and non-price attribute of the product (Q). It shows that any product attribute which includes nutrition content, safety, production process and even inputs, would creates utility or disutility. The analysis in Chapter 4 directly deals with the two of these factors namely, consumer characteristics (ie. preferences, and religious needs) and product attribute (ie. Halal credence). Hoehn and Deaton (2004) provided a model where consumers choose either purchasing credence (high-quality) good or conventional (low-quality) goods by comparing the consumer surplus differences. If the gain from consumer surplus from credence goods is large, compared to the opportunity cost of surplus given up from not purchasing conventional goods, the former good would be purchased. Their studies are used as a foundation for the analysis in Chapter 4 of this paper. Most literature reflects credence goods as vertically differentiated products due to quality differences. Nonetheless, Bester (n.d., in Roe and Sheldon, 2001) provided a concept of unobserved quality into a horizontal differentiation model and suggested that unobserved vertical quality would reduce producers incentives for horizontal differentiation via relaxing price competition amongst producers, in a way which prices act as a signal and consist of a quality premium. This is related to the second part of this papers analysis (Section 4.2. of Chapter 4) involving a franchise market. Consumers demand and preferences for credence goods often perceived from their willingness to pay. 3.2.1. Willingness to Pay There are other factors why consumers might be willing to pay a premium besides the quality attribute, such that they perceive credence goods as fashionable, trendy, or it could be that the purchase the alternative to credence goods would offend other people (McCluskey, 2000). The later is pertinent to Halal goods, especially in a situation where the consumer lives with Muslims housemates, or in a Muslim-dominated country. Consumers would also prefer for the high-quality products, even not for the sake of quality itself but other factors. For instance, when consumers care about other quality or criterion such as animal welfare, environmental, ethical, and religious reasons, to what Antle (1999, in Carlsson et. al., 2004) referred as extrinsic quality. If the distinctions in quality were signalled efficiently, consumers would be willing to pay a higher price or premium for products of high quality, hence compensating the higher production costs, as suggested by Kola and Latvala (2003). In their research on the effects of information on the demand for beef products credence characteristics in Finland, 59 percent of the respondents showed their willingness to pay a higher price for additional information. Whereas, 41 percent of respondents had zero willingness to pay, in which 35 percent of them are satisfied with the existing information, and 17 percent considered the information is not enough or they did not trust the information. As credence quality of a product cannot be observed directly at a reasonable cost or without invasive testing, consumers would rely heavily on claims or information made by the producers via brands, labels or advertisements (Cho and Hooker, 2002). This papers analysis however, only considers that consumers fully trust producers. The next section provides discussion if the information provided is insufficient or inaccurate, resulting a market failure. 3.3. Market Failure It can be said that the credence market are prone to the problems of market failure. There are different ways for a credence market to result in inefficiency. It is mainly due to information asymmetry between producers and consumers. 3.3.1. Information Asymmetry In credence goods, consumers cannot directly observe the quality of the goods that they consume where only the producers know the exact quality, thus resulting information asymmetry. Common intuition indicates that the solution for an information asymmetry is by providing more information. Information, as conferred by Weiss (1995, in Cho and Hooker, 2002) is the central tenet of food safety economics. Brands, logos and labels most importantly serve as a signal to inform and communicate to the consumers about products attributes, hence alleviating information asymmetry between producers and consumers. According to Verbeke (2005), information is likely to be effective only when it addresses specific information needs of its target audience. It requires identification and detailed understanding of these needs, and proper management on the provision of the information in order to optimally address the needs (ibid.). Information regarding food quality and safety can be categorised as risk information and aims at reducing uncertainty faced by the consumers in making purchasing decisions. Hence, success would come from better understanding regarding consumers attitude, behaviour, motives, and their perceptions (Frewer et. al., 2004, in Verbeke, 2005). There exist welfare effects to consumers for providing (Marette et. al., 1999, in ibid.) or withholding (Mazzocchi et. al., 2004b, in ibid.) food quality information. The work done by Umberger (et. al., 2008), can be used as a foundation on the argument for the importance of Halal logo or labelling on food products in particular. The authors claimed that potential market failure would occur if consumers face limited choice and if the access to ‘innovative products is not available, or information regarding ‘product attributes, for example the production methods, is not transparent (ibid.). With this regards, Halal products would be seen as innovative products and carry some product attributes that must be fulfilled, otherwise there might exist market failure for Halal products. Halal logo especially from organisation for Halal certification, could be used to indicate these attributes. Consequently, lack of information becomes the key factor for the inefficiency of credence market. The followings are resulted from insufficient information. 3.3.1A. Failure due to Fraud In their studies, Dulleck and Kerschbamer (2001) divided credence attribute problems into two fold: inefficiency treatment, and overcharging. The first fold refers to the quality level (or service) of credence goods provided by producers, and inefficiency treatment can be either under- or over-treatment. On the other hand, the second fold refers to the pricing of credence goods, particularly as self-described, overcharging. When the signal is unavailable, especially in the case where labelling is not mandatory, sellers may have the incentive to fraud by supplying products of low-quality but claiming these products as high quality. Akerlof (1970) explains this situation with automobiles market as an example, in which with asymmetric information high-quality goods (‘peach) would be driven out by the low-quality goods (‘lemons) hence resulting market failure. Moreover, as argued by Liebie (2002), when producers of low-quality products claim to be of high-quality, this would raise doubt in consumers mind and would not be willing to pay a premium for the high-quality goods. This in turns, would lower the profits of high-quality producer hence reducing their incentive to invest in high-quality products, in which would create further doubt to consumer. The cycle goes on until only low-quality products would be sold, even though consumers prefer high-quality products, resulting market failure. Darby and Karni (1973) suggested that the amount of fraud depends on reputation, market conditions, and technological factors. Profit-maximising producers would have the incentive to fraud by claiming their products are of high quality if the probability of not being caught is high enough (McCluskey, 2000) or conversely if the probability of being caught is low. Such fraud issues bring uncertainty to consumers. 3.3.1B. Problems of Uncertainty Bonroy and Constantos (2008) concluded that uncertainty by consumers on the identity of producers which produce the high-quality products put the high-quality producers in disadvantage resulting from higher cost. They argued that this disadvantage would remain even when the consumption of high-quality products benefits are well worth the cost difference and all beliefs regarding the high-quality producers are in the right direction (ibid.). Their model explains the difficulty faced by high-quality credence products to acquire the dominant market share they should have obtained from efficiency perspective (ibid.). This is however beyond the concept of this paper, as to avoid complication in the model, it is assumed that producers behave honestly in producing the products and consumers fully aware the qualities. 3.3.1C. Non-Rational Behaviour Unavailability of credible food quality labelling, consumers would face uncertainty and would incur search cost on specific information (Hobbs, 2004, in Verbeke 2005). As a result some consumers would not behave rationally, being ignorant, or make decisions which are not maximising their expected utility. Such behaviour explained as a concept of â€Å"bounded and limited rationality† or â€Å"rationally ignorant consumer hypothesis† (as found in Kahneman and Tversky, 1973; Simon 1979a,b; Camerer and Loewenstein, 2004; in Verbeke 2005), is however beyond the concept of the study in this paper. Verbeke (2005) concluded that without quality verification, traceability was of little value to consumers, whereas quality assurances were much more valuable to them. The solutions to the problems of market failure are presented in the next section. 3.4. Solutions to the Problems This section examines some of the solutions to the problems mentioned previously which are mainly caused by lack of information. The most common solution this, as stated earlier, is providing more information through labelling or signalling. But this must be accompanied with efficient monitoring. 3.4.1. The Use of Labelling as a Signal It is generally known that labelling of credence attribute could be used as a way to certify the provision of valued attributes, hence to avoid market failure. Moreover, Caswell and Padberg (1992) claimed that information in the form of labels, word-of-mouth, advertising, and education would contribute to the co