Kathleen Segerson
required to pay damages,24 then in the absence of a responsive market or
the background threat of regulation, they would face no incentive to invest
in voluntary food safety measures.
IV. The Role of the Market
As noted above, two key determinants of the decision to undertake
protective measures voluntarily are the expected changes in the net revenue
that would be earned by the firm and the expected loss that the firm would
incur with and without those measures. However, depending on the
structure of the market and the nature of the product and damages, these
two determinants may not be independent. The crucial issue in
determining their independence is whether consumers correctly perceive
the potential hazards associated with consumption of the product and
hence adjust their willingness-to-pay for the product accordingly.
Antle (1998) distinguishes among three different categories of goods,
depending on the information about the safety of the good that is available
to consumers.25 The first category is search goods. This includes goods
for which the consumer is able to obtain information about the safety of the
good either through inspection or through readily available information
about the product. For such goods consumers have near perfect
information about product safety before purchasing the good. The second
category is experience goods, which includes goods for which the
consumer can obtain information about the product safety through repeated
purchases or through reputations established by purchases by others.
While the information set of the consumer may not be complete at the time
of the initial purchase, in long run equilibrium the consumer will have near
perfect information about product quality. Because of the information that
is available to consumers, we would expect the demand for both search and
experience goods to be responsive to changes in product safety.26
The third category of goods is credence goods, where information about
product safety cannot be discerned by the consumer, even after repeated
consumption of the good. For such goods, the demand for the product will
not be responsive to changes in product safety since consumers will be
24 Failure to pay for damages might result either from the lack of an explicit
designation of firm liability or because of imperfections in the application of the
relevant liability principle. See further discussion below.
25 See also Darby and Karni (1973).
26 Theoretical models of the effect of food safety on consumer demand are
presented in Smallwood and Blaylock (1991) and Choi and Jensen (1991).
Researchers have examined historical responses to changes in food safety
information (see, e.g., van Ravenswaay and Hoehn (1991) for a study of Alar
residues on apples). In addition, surveys have been used to estimate changes in
demand due to perceived changes in food safety. See, for example, Preston et al.
(1991), and a number of studies presented in Caswell (1995).