Packaged food and market economics

Anu Singh, June 19, 2015:

Maggi controversy not only affects the bottom lines of Nestle, but the entire pack-aged food industry.

Controversy over the popular brand of Maggi noodles has the potential to adversely impact the entire packaged food market from soups and baked beans to gulab jamuns and biscuits or other items owing to the problem of “asymmetric information”. 

When information is imperfect or asymmetric, either a buyer or seller is bound to have inadequate data about a product which does not make good business sense. It is not a market friendly practice.

With “asymmetric information”, the scope for market failure or market inefficiencies tend to be higher. Clearly, product information between buyers and sellers is integral to any market-related transaction.

Regulatory institutions like the Food Safety and Standards Authority of India help reduce the problem of “asymmetric information” between buyers and sellers to enhance market efficiency. For instance, a cigarette manufacturer must mention the health risks associated with smoking on the cigarette packet itself. Similarly, in the case of ice-creams it is necessary to communicate on the package whether or not these frozen milk food contain eggs.

Under the Food Safety and Standard Act of 2006 and 2011, packaged food products which are sold must have a mandatory colour code, either green or red dot marking, in order to differentiate between vegetarian and non-vegetarian food.

According to the emerging academic discipline of institutional economics, regulatory institutions reduce the extent of imperfect information to create better market conditions.

According to eminent economist George Akerlof, product quality and uncertainties related to it create a ‘market for lemons’ or a poor quality product which is applicable to Maggi noodles in the packaged food market. Consumers are compelled to make assumptions based on their previous experiences. 

In this case also, consumers can assume that other packaged food brands also may not follow the prescribed norms and standards. Such assumptions have scope to threaten those brands which follow the official standard set of guidelines. Therefore, lack of information not only reduces consumer confidence in Maggi noodles but also in other packaged food. 

Especially after the Maggi episode, consumers would become far more sensitive to packaged food over incorrect information or sometimes hidden facts which can, to an extent, have health risks. So much so, health sensitive consumers would be reluctant to buy/ consume other packaged food products.

So, the good news for competitors of one product or brand can become bad news for another one -- if consumers are irrational. Institutional and behavioural economics assumes that consumers do not behave ‘rationally’ and carry ‘bounded rationality’ since their present behaviour is an outcome of their past experience.

Given these realities, the demand for all packaged food products are likely to decrease and with depressed demand, prices are bound to drop. This makes it difficult for high quality products or reputed brands to sustain their long term profitability. 

Often high quality products too tend to become economically unviable and their factories could close shop or worse still, reduce their quality parameters. In both cases, there are high chances for the packaged food market to collapse.