Experimental Evidence of Risk Aversion in Consumer Markets: The Case of Beef Tenderness

below 0.8, 17 participants (33%) had a risk ratio below 0.9, 38 participants (75%) had a risk ratio
below 1, and 49 participants (96%) had a risk ratio below 1.1.

Conclusions and Implications

In our experimental auction, 75% of the participants were risk averse in their choice of beef. The risk
aversion evident suggests that consumers want to avoid inconsistencies in quality and, therefore,
assign a negative value to uncertainty regarding tenderness. This result suggests that low stake but
high probability risk is important in the beef market and is likely to be important in other markets for
unprocessed or semi-processed foods such as meat, fish, fruits, and vegetables.

The participants were willing to pay 50% more for very tender beef and 25% more for tender
beef compared with less tender beef. Further, the participants were not only interested in the average
tenderness, but also the consistency of quality. On average, the bids for tenderness-categorized beef
were 8% higher than the bids for non-categorized beef with identical tenderness distribution.

Currently, beef is sold as an experience good where the quality can be judged only after the
purchase. Most beef is sold without any categorization of tenderness and beef processors have tended
to focus on low-cost production. Labeling may transform beef from an experience good to a search
good for which consumers have information regarding tenderness before purchase. In this study, the
tenderness of the beef was accurately determined. Such precise determination may be beyond the
scope of meat processors. However, the risk can be reduced by a tracking system that follows the
production of beef. Factors that influence the end quality can then be monitored and a good estimate of
tenderness provided as a basis for labeling. The profitability of such a marketing strategy depends on
whether the tracking, labeling, and segmentation costs are lower than the predicted 8% increase in
value.

Footnotes

¹ In global terms, Norway has a high organizational participation rate. In the Oslo area, for example,
49% of the population responds that they actively participate in at least one organization (Statistics
Norway). Recruiting through organizations, therefore, gives a fairly representative sample of the
population.

² November 14, 2003: NOK100 = US$14.31 = €12.20 (www.oanda.com)

³ The WB scores for the sample fillets of A, B, C, and V were 31, 39, 58, and 32, respectively.

⁴ We use this non-parametric test in all our bid comparisons.

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