Willingness to Pay for Beef Quality Attributes: Combining Mixed Logit and Latent Segmentation Approach

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1 Wllngness to Pay for Beef Qualty Attrbutes: Combnng Mxed Logt and Latent Segmentaton Approach Chanjn Chung Department of Agrcultural Economcs Oklahoma State Unversty Stllwater, OK Emal: Phone: Fax: Bran Brggeman Department of Agrcultural Economcs Oklahoma State Unversty Stllwater, OK Emal: Phone: Fax: Sungll Han Department of Lvestock Busness Management and Marketng Economcs Konkuk Unversty, Seoul, Korea Emal: Phone: Fax: Selected paper prepared for presentaton at the Amercan Agrcultural Economcs Assocaton Annual Meetng, Orlando, Florda, July 27 - July 29, Copyrght 2008 by Chanjn Chung, Sungll Han, and Bran Brggeman. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copy rght notce appears on all such copes. Chanjn Chung and Bran Brggeman are assocate professor and assstant professor n the Department of Agrcultural Economcs at Oklahoma State Unversty, respectvely, and Sungll Han s professor at Konkuk Unversty, Seoul, Korea. Sungll Han s a correspondng author. Ths research was supported by the Oklahoma State Unversty Agrcultural Experment Staton and partal fundng was provded by Konkuk Unversty, Seoul, Korea.

2 Wllngness to Pay for Beef Qualty Attrbutes: Combnng Mxed Logt and Latent Segmentaton Approach Abstract Ths study develops an alternatve way of dentfyng the heterogenety of WTP estmates for product attrbutes. The alternatve approach combnes mxed logt models wth a latent segmentaton method (MLS). Frst, the combned MLS approach estmates a mxed logt model and retreve ndvdual specfc parameter estmates based on ndvdual specfc posteror dstrbuton derved from the ndvdual sequence of observed choces n the conjont experments. Second, WTPs of each choce varables are computed for each ndvdual usng the margnal rate of substtuton between economc and choce varables. Fnally, latent segmentaton s conducted based on WTPs, ndvdual perceptons on qualty attrbutes, and demographc characterstcs, and WTPs are compared among segments. The MLS approach s appled for estmatng wllngness to pay for beef qualty attrbutes and country-of-orgn n the Korea market. The MLS approach allows us to dentfy varous clusters based on people s preferences and demographcs, and provde estmates of wllngness to pay for beef qualty attrbutes and country-of-orgn for these clusters. 2

3 Wllngness to Pay for Beef Qualty Attrbutes: Combnng Mxed Logt and Latent Segmentaton Approach The condtonal logt model has been wdely used for wllngness to pay estmaton n the choce experment lterature. The condtonal logt model assumes that all ndvduals share the same parameters for all attrbutes, whch ndcates that ndvduals have the same preferences for attrbutes of the product n queston. To account for respondent heterogenety, some studes have used the mxed logt approach and found that mxed logt models yeld better estmates compared to the tradtonal condtonal logt model. However, the mxed model cannot dentfy the sources of unobserved heterogenety from respondents. To dentfy the heterogenety of wllngness to pay (WTP) estmates, one mght consder ncorporatng a number of soco-demographc and other respondent characterstc varables n the logt models. However, n the choce experments, whle attrbutes of the product under evaluaton vary across alternatves, those of ndvdual specfc characterstcs reman the same across alternatves. Therefore, they cannot drectly enter nto the model on ther own as the condtonal effects of ndvdual characterstcs on the probablty of choosng specfc alternatves are not dentfable. Alternatve way may be, therefore, to construct nteracton varables between ndvdual characterstcs and choce-specfc attrbutes or wth alternatve-specfc constants and nclude them n the model (Hanley et al., 2001; Umberger et al., 2002; Chung et al., 2008). However, as one can expect, the estmaton tends to face a problem of losng a large number of degree of freedom and thus of convergence, n partcular, when the nonlnear estmaton procedure s requred. 3

4 We propose an alternatve way of dentfyng the heterogenety of WTP estmates for product attrbutes. The alternatve approach combnes mxed logt models wth a latent segmentaton method (MLS). Frst, the combned MLS approach estmates a mxed logt model and retreve ndvdual specfc parameter estmates based on ndvdual specfc posteror dstrbuton derved from the ndvdual sequence of observed choces n the conjont experments. The procedure that recovers ndvdual specfc parameter estmates are drawn from Revelt and Tran (1998) and Greene (2004). Second, WTPs of each choce varables are computed for each ndvdual usng the margnal rate of substtuton between economc and choce varables. Fnally, latent segmentaton s conducted based on WTPs, ndvdual perceptons on qualty attrbutes, and demographc characterstcs, and WTPs are compared among segments. Our study apples the MLS approach for estmatng wllngness to pay for beef qualty attrbutes and country-of-orgn n the Korea market. The MLS approach allows us to dentfy varous clusters based on people s preferences and demographcs, and provde estmates of wllngness to pay for beef qualty attrbutes and country-of-orgn for these clusters. Snce the lberalzaton of mported beef market n 2001, Korea has contnuously ncreased beef mport, and the market share of mported beef has ncreased up to 53% of total beef consumpton n Recently, the market share of mported beef has decreased consderably after the Korean government banned mports of U.S. beef due to the bse problem. Overall, prces of mported beef are approxmately 3.5 tmes lower than the prce of Korean beef at the retal level. The source of ths prce dfferental between domestc and mported beef n the Korean beef market s unclear. In partcular, 4

5 why do Korean consumers value domestc beef almost 3.5 tmes hgher than mported beef despte the trade lberalzaton? What are mportant qualty attrbutes that affect Korean consumers valuaton of beef?, and are there any dfferences n valuaton of these attrbutes among clustered groups? Answers to these questons provde mportant nformaton for U.S. beef exporters n developng ther marketng strateges n the Korean beef market. The objectves of ths study are to frst develop a combned approach of mxed logt and latent segmentaton method to effectvely dentfy the heterogenety of wllngness to pay (WTP) estmates for beef qualty attrbutes n the Korean beef market. If such heterogenety exsts, a second objectve s to determne the factors that derve dfferent levels of WTP for qualty attrbutes such as marblng, freshness, chlled vs. frozen, food safety (e.g., bse, GMO, and antbotcs), and country-of-orgn. By estmatng the probablty that each respondent belongs to each segment, our study also determnes segment membershp and descrbes each segment s typcal demographc and percepton profle on qualty attrbutes usng surveyed demographc and percepton data. Mxed Logt Model The tradtonal condtonal logt model assumes that all ndvduals share the same parameters for all attrbutes, whch ndcates that ndvduals have the same preferences for qualty attrbutes and country-of-orgns of beef n the Korean market. The condtonal logt s also derved based on the ndependence of rrelevant alternatves (IIA) assumpton, whch results from the assumpton of ndependently dstrbuted errors across alternatves. The mxed logt model (ML) allows the parameters of attrbutes to vary 5

6 across populaton and relaxes the IIA assumpton (Tran 2003). In the ML, β s for ndvdual have the relatonshp, (1) β = β +, du where β s the populaton mean, d s the standard devaton of the margnal dstrbuton of β, and u s a random error term wth the normal assumpton of mean zero and standard devaton one (see Revelt and Tran 1998; Layton and Brown 2000; Tran 2003; Greene 2004; and Campbell 2007 for further detals for the applcaton of ML). The stochastc term du represents the ndvdual s heterogenety n preference on product attrbutes relatve to the average preference n the populaton. In our applcaton of ML, all β s vary wth the normal dstrbuton. The ML provdes the flexblty to varyng ndvdual preferences over attrbutes wthn a data set. We use NLOGIT procedure n LIMDEP (2003) to retreve ndvdual specfc parameter estmates. Margnal rates of substtuton among any attrbutes, x, can be calculated as the rato of the coeffcents. Wllngness to pay (WTP) or margnal value of an attrbute can be estmated by dvdng the estmated coeffcent for the attrbute by the coeffcent of payment vehcle. For example, when β k s the estmated coeffcent for the Prce attrbute, WTP for jth attrbute s: (2) WTP = -β j /β k. To facltate statstcal nferences for the WTP estmates, standard devatons of ndvdual WTPs are provded for each segment. 6

7 Latent Class Cluster Model Identfyng mutually exclusve groups of consumers has been the focus of many marketng studes (see Punj and Stewart, 1983 for a revew). These emprcal studes tend to use standard herarchcal and non-herarchcal clusterng algorthms to dentfy groups of observatons that share common characterstcs wthn a gven data set. Identfyng groups of consumers better nforms advertsng, prcng, product development, etc. or marketng decsons made by a frm. In our case, dentfyng groups wth smlar wllngness-to-pay (WTP) estmates wll dentfy ndvduals that share smlar values n food purchasng decsons. As wll be demonstrated later, the latent class model wll provde rcher dscusson of the WTP estmates than tradtonal clusterng models because t wll have accounted for the heterogenety wthn the sample. A common crtcsm of standard clusterng models s that they are not based on a sound statstcal model. To crcumvent ths crtcsm, the latent class model for clusterng below s based on a probablty densty functon that s then maxmzed through a lkelhood functon to determne the number of K classes and membershp n each class. An advantage of maxmzng a lkelhood functon relatve to standard clusterng technques s that the optmal number of classes can be determned through standard statstcal tests (Magdson and Vermunt, 2002). Magdson and Vermunt further show that a latent class clusterng model s preferred to the more standard k-means clusterng algorthm. Followng Vermunt and Magdson (2005), the probablty densty functon for contnuous response varables s: K (3) f ( z ) = P( x z ) f ( y x, z ) y, x= 1 T t= 1 t 7

8 where y s the estmated WTP for beef attrbute t for ndvdual ; z are ndvdual covarates such as demographcs, preferences, etc.; x s the latent varable or number of classes or clusters to be estmated; K s the number x clusters to be estmated; P(.) s the pror probablty of belongng to x, whch s parameterzed as multnomal logt model; T s the total number of beef attrbutes assessed by each th person. Snce f ( y x, z ) t s based on y contnuous varables and s multvarate, the probablty functon s specfed as a multvarate normal dstrbuton as follows: 1 = π Σt, x t t, x, z Σ t x t t, x, z, 2 Kt / (4) f ( y x, z ) ( 2 ) ( y u ) ( y u ) 1/ exp t where u t,x,z s a vector contanng the condtonal expectatons of the y varables belongng to set t, and Σ t, x s ther varance covarance matrx. Maxmum lkelhood estmaton s then employed to fnd estmates of θ that maxmzes the followng log-lkelhood functon: I (3) L = log f ( y z,θ) log. = 1 Model parameters are estmated by jontly usng the EM and Newton-Raphson algorthm as shown n Vermunt and Magdson (2005). Survey Desgn and Data Data was collected through an n-person consumer survey targeted toward Korean beef consumers. The survey was conducted n January and February of Eleven agrcultural economcs students (undergraduate and graduate students) conducted surveys wth 1,000 grocery shoppers usng randomzed choce sets and attrbute level desgns for each respondent. The ntervewers were sent to small and large grocery stores n Seoul, 8

9 Korea, and a convenence sample of survey partcpants was solcted at store gates. Usng choce experments (often referred to as conjont analyss), respondents were asked what type of beef they would buy among choce sets n each ndvdual s survey. Each choce set ncluded alternatve types of beef wth varous levels of prce, qualty, and country-of-orgn attrbutes. The data derves from orthogonally-desgned conjont choce sets presented to survey partcpants desgned to test Korean beef qualty, prce attrbutes, and survey complexty effects on wllngness to pay. Table 1 summarzes attrbutes and levels of each attrbute ncluded n choce experment desgn. The attrbute prce has eleven levels rangng from $10 to $35 per pound. Fve levels of marblng grade are consdered followng the current gradng scale n Korea, and three levels are consdered for freshness. The survey also ncludes three qualty attrbutes: chlled or frozen beef, free of antbotcs or not, and free of GMO feed ngredents or not n beef producton. Fnally, three dfferent country-of-orgns are consdered: Korean, U.S., and Other. Therefore, wth the number of attrbutes and attrbute levels n Table 1, a full factoral desgn results n 3,960 scenaros. An example of a choce set wth 5 optons, ncludng the status quo opton, s llustrated n Fgure 1. Table 2 presents summary statstcs of the demographc characterstcs of survey partcpants. Out of 1,000 partcpants, 6.3% were n ther 20s, 14.8% were n ther 30s, 61.4% were n ther 40s and 50s, and 17.5% were over 60. The gender rato was heavly skewed towards women; 16.3% were male and 83.7% were female whch s not surprsng because most grocery shoppers n Korea are tradtonally female. 3 Almost 60% of partcpants had some college, a college degree, or a post-college graduate degree. 9

10 The majorty of partcpants, 59.9%, were full-tme homemakers. Low ncome (less than $24,000 annually), medum ncome (between $24,001 and $60,000 annually), and hgh ncome (over $60,000 annually) households made up 13.5%, 57.6%, and 28.9% of the sample, respectvely. Results Emprcal analyss s beng conducted and results wll be presented at the meetng. Expected Contrbutons The study s expected to fll the gap n understandng prce dfferentals between Korean and mported beef, as well as the prce varaton among mported beef. Partcularly, our research focuses on dfferences n valuaton of qualty attrbutes and country-of-orgn among clustered groups. Fndngs from ths research s expected to offer mportant nformaton for U.S. beef exporters n developng ther marketng strateges n the Korean beef market. 10

11 References Campbell, D Wllngness to Pay for Rural Landscape Improvements: Combnng Mxed Logt and Landom Effects Models. Journal of Agrcultural Economcs 58(3): Chung, C., S. Han, and T. Boyer Valung Qualty Attrbutes and Country Equty n the Korean Beef Market. A selected paper for 2007 Amercan Agrcultural Economc Assocaton Annual Meetng, Portland, Oregon, July 30 - August 1, LIMDEP Verson Econometrc Software, Inc., Planvew, NY. Greene, W Interpretng Estmated Parameters and Measurng Indvdual Heterogenety n Random Coeffcent Models. Workng paper: Department of Economcs, Stern School of Busness, New York Unversty. Hanley, N.D., S. Mourato, and R.E. Wrght Choce Modelng Approaches: A Superor Alternatve for Envronmental Valuaton? Journal of Economc Surveys 21: Layton, D.F., and G. Brown Heterogeneous Preferences Regardng Global Clmate Change. The Revew of Economcs and Statstcs 82: Magdson, J., and Vermunt, J.K Latent class models for clusterng: A comparson wth K-means. Canadan Journal of Marketng Research, 20, Punj, G. and D.W. Stewart Cluster Analyss n Marketng Research: Revew and Suggestons for Applcaton. Journal of marketng Research, 20,

12 Revelt, D. and K. Tran Mxed Logt wth Repeated Choces: Households Choces of Applance Effcency Level. The Revew of Economcs and Statstcs 80: Tran. K., Dscrete Choce Methods wth Smulaton, Cambrdge Unversty Press, Umberger, W.J., D.M. Feuz, C.R. Calkns, and K. Kllnger-Mann U.S. Consumer Preferences and Wllngness to Pay for Domestc Corn-Fed Beef Versus Internatonal Grass-Fed Beef Measured Through and Experment Aucton. Agrbusness 18(4): Vermunt, J.K and J. Magdson Techncal Gude for Latent GOLD 4.0: Basc and Advanced. Belmont Massachusetts: Statstcal Innovatons, Inc.. 12

13 Table 1. Attrbutes and Levels n Choce Experment Desgn Attrbutes Levels Prce ($/lb) $10, $12.5, $15, $17.5, $20, $22.5, $25, $27.5, $30, $32.5, $35 Marblng Extra Premum, Premum, A, B, C Freshness Hgh, Medum, Low Chlled (vs. frozen) Yes, No Free of antbotcs Yes, No Free of GMO feed ngredents Yes, No Country-of-orgn Korean, U.S. Other exportng countres 13

14 Table 2. Summary Statstcs on Demographc Characterstcs of Survey Partcpants Varable % Varable % Age 20s 30s 40s 50s Over Occupaton Professonal job Full-tme homemaker Offce worker Publc offcal Own busness Unemployed Gender Male Female Educaton Less than hgh school Hgh school Some college/college Graduate school Annual Income Less than $24,000 $24,001 ~ $60,000 $60,001 ~ $96,000 More than $96,

15 Fgure 1. An Example of Choce Set Used n Choce Experment Opton 1 Opton 2 Opton 3 Opton 4 Prce (won/lb) 15,000 15,000 17,500 10,000 Marblng Extra A A Premum Grade Premum Freshness Hgh Hgh Moderate Moderate Chlled (vs. Frozen) Yes No Yes Yes Free of antbotcs No Yes Yes Yes Free of GMO Yes Yes Yes Yes County of Orgn US Other Korea Other I would choose I would not choose ether of these optons