Modelling Reference-Dependent and Labelling Effects. in Consumers Functional Food Choices

Transcription

1 Modellng Reference-Dependent and Labellng Effects n Consumers Functonal Food Choces Nng Nng Zou (Helen) * *PhD Canddate, Department of Boresource Polcy, Busness & Economcs, Unversty of Saskatchewan, emal: nz206@mal.usask.ca Supervsed by Jll E. Hobbs ** ** Professor, Department of Boresource Polcy, Busness & Economcs, Unversty of Saskatchewan Selected Paper prepared for presentaton at the Southern Agrcultural Economcs Assocaton Annual Meetng, Atlanta, Georga, January 31- February 3, 2009 Copyrght 2009 by Nngnng Zou and Jll E. Hobbs. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes. 1

2 Modellng Reference-Dependent and Labellng Effects n Consumers Abstract Functonal Food Choces Ths paper examnes the reference-dependent and labellng effects when consumers make choces about functonal foods, and explores how changes n reference ponts could alter ndvduals preferences. Functonal food (Omega 3 mlk) and regular food (regular mlk) are used as examples to explore the potental reference-dependent effects and labellng effects. A consumer utlty model wth reference pont effects s developed. The paper also explores how to model the effects of dfferent labellng (health clam) polces, whch could nfluence consumer preferences by changng consumers reference ponts. 1. Introducton Even a casual perusal of food products on offer n a supermarket n Canada, the US, Europe or Japan would reveal a growng array of new food products whch clam to provde health benefts, so-called functonal foods. Usually the prces for these products are hgher than for an equvalent conventonal (regular) food. For example, frut uce wth calcum whch s clamed to be good for the bones, breakfast cereals wth soluble fbre, clamed to be good for the heart, and omega-3 mlk whch s beleved to be good for heart health and perhaps may reduce the rsks of cardovascular dseases and cancer. The functonal food sector s one of the fastest-growng sectors n the food ndustry. The global market for functonal foods was estmated to be worth about US$33 bllon n 2000 (Hllam, 2000), and had grown to an estmated US$85 bllon by 2006 (Nutrton Busness Journal, 2007). Functonal dary products, such as omega-3 mlk, probotc and prebotc yogurts, are one of the earlest and most wdely adopted forms of functonal foods. 2

3 Relatvely lttle soco-economc research has examned the functonal food sector n Canada. When makng food choces, an ndvdual consumer mght over-consume unhealthy foods or under-consume healthy foods. Understandng how consumers make choces wth respect to functonal foods s an mportant new research area 1. In the standard models of decson makng, the Expected Utlty Theory (EUT) s a tradtonal one to model consumers choce behavors, n whch the utlty of a choce s represented by the sum of the possble outcomes weghted by ther probabltes. Although EUT s a long lastng and well developed theory, there are some alternatve theores n behavor economcs gvng some llustratve evdences that volate and make a fundamental bas on the prncple of EUT, such as the so-called Prospect Theory (Kahneman & Tversky, 1979) whose creators won a Nobel Prze n economcs. The Prospect Theory s orgnally about the analyss of decson makng under uncertanty and represented by an asymmetrc S- shaped value functon, n whch value s measured by gans or losses rather than fnal assets. Derved from the Prospect Theory, the same authors created another more developng consumer choce theory for rskless choce called a Reference-Dependent Model ((RDM, Tversky & Kahneman, 1991). The central assumpton of RDM s that losses and dsadvantages have greater mpacts on preferences than gans and advantages, whch means people wll work harder to avod losses than to obtan gans. Accordng to the psychologcal analyss of value, reference levels play a large role n preference determnacy. People are more senstve to an outcome valued as a gan or a loss comparng wth a reference level than the absolute fnal outcomes. 1 See Zou and Hobbs (2006) for a more detaled overvew of the functonal food sector and a dscusson of potental models for evaluatng consumer preferences. 3

4 The Prospect Theory shows that people s preferences volate the prncple of EUT when makng decsons among rsky prospects by several dstnct effects, such as the certanty effect, the reflecton effect and the solaton effect. The certanty effect shows a phenomenon that people tend to place more weght on outcomes that are vewed as certan rather than outcomes assocated wth probabltes. The reflecton effect means that preference for the negatve prospects (losses) s the mrror mage of the postve prospects (gans) whch means that the preference order changes around value zero. Combnng the certanty effect and the reflecton effect together shows that people are rsk averse n choces nvolvng sure gans and are rsk seekng n choces nvolvng sure losses. The solaton effect shows that when makng choces, people tend to gnore the common components that the alternatves share, and focus on the components that dstngush them. In Prospect Theory, outcomes are expressed as changes (gans or losses) from a neutral reference pont. There are two mportant propertes of ths theory: reference dependent and loss averson. Reference dependence means that ndvduals preferences depend on a reference pont; and a change n a reference pont often leads to reversals of preference. Loss averson means losses domnate gans, and people wll work harder to avod losses than to obtan gans. Functonal foods are a credence good whch means people can not nfer the qualty before or even after purchase and consumpton. Ths mght be the greatest nherent lmtaton for functonal food products. How to defne the general health benefts? (e.g. how could people tell calcum s good for bones?) Even f a consumer beleves that the effect of functonal food s to mprove health benefts (gans), there are stll some uncertan factors n the consumer s mnd about how and whether functonal food could work for hs own body, 4

5 because wthout more nformaton, the qualty of functonal food can not be effectvely nferred. Usng an example of functonal dary products, ths paper examnes how referencedependent and labellng effects could be used to model consumer preference changes n functonal food choces. In partcular, ths approach recognzes that consumers make choces dependng on ther current health status, the credblty of health clams, and the extent to whch they beleve that the ntroducton of a functonal ngredent wll lead to an mprovement n ther health status. 2. Examples of Reference-Dependent Effects: Preference Change Let s take regular yogurt and probotc yogurt as an example to show how an ndvdual s preferences mght change when hs reference pont changes. As shown n fgure 1, one consumer bundle of goods s represented by X { x, y, r, s} =, wth x & y denotng optons, and r & s denotng reference ponts. Each opton X=(x) represents one unt of regular yogurt wth two product attrbutes: health beneft and prce. Bundle Y=(y) represents one unt of probotc yogurt (functonal food), also wth the same two attrbutes but at dfferent levels. Fgure 1: Reference Ponts change for one person 5

6 Ths fgure shows us how changes n an ndvdual s reference pont could change that consumer s preferences. Suppose a consumer vsts a store and notces one type of yogurt wth 2 unts of health benefts sellng at $8 (pont s). The consumer takes ths nformaton as hs reference pont, and ths ndvdual would be ndfferent between spendng $8 to receve a probotc yogurt (y) wth 16 unts of health benefts or spendng $2 to receve a regular yogurt (x) wth 10 unts of health benefts. So hs ndfference curve s Us n fgure 1. Suppose on another day, the same consumer vsts another store and dscovers that there s another type of yogurt also wth 2 unts of health benefts, but that ths yogurt s prced at $2 (pont r). The consumer s reference pont has changed from s to r, and n ths new nformaton envronment he wll be ndfferent between spendng $8 to get the probotc yogurt wth 16 unts of health benefts or spendng $2 and recevng 8 unts of health benefts. So the consumer s ndfference curve shfts to Ur, whch les beneath hs orgnal ndfference curve Us. Now, the consumer prefers the regular yogurt (x) over the probotc yogurt (y). Developng the case further n fgure 2, we can show how the preferences of two consumers change to dfferent levels when ther reference ponts change. We assume that two consumers ntally have the same ndfference curve Us and assume that pont s ($8, 2unts) s ther reference pont. If condtons change n the market such that another reference pont r ($2, 2 unts) s avalable, they change ther reference pont from s to r. 6

7 Fgure 2: Reference Ponts Change for two person Consumer 1 s new ndfference curve shfts to Ur1, whch means that the probotc yogurt ($8, 16 unts) delvers the same utlty as the regular yogurt ($2, 8 unts). However, consumer 2 s new ndfference curve shfts to Ur2, mplyng that the probotc yogurt ($8, 16 unts) delvers the same utlty as a dfferent regular yogurt ($2, 6 unts). Thus, the two consumers react dfferently. From fgure 2 we can see that Ur2 les beneath Ur1, ndcatng that consumer 1 s more concerned about health benefts than consumer 2, or alternatvely, consumer 2 s more prce senstve than consumer 1. Buldng on Tversky and Kahneman (1991), ths paper explores an extenson to the reference dependent model. Frst, t should be noted that there are two knds of reference pont effects: one s well known, that ndvduals wth dfferent reference ponts wll have dfferent preferences; the other more nterestng possblty s that an ndvdual s preferences could change f hs reference pont changes. Here we explore that possblty as an approach to modellng the effects of dfferent nformaton envronments on consumer preferences for functonal food. 7

8 3. Modellng Consumer Utlty wth Reference-dependent Effects To capture the reference dependent effects from the reference-dependent model, frst t s necessary to specfy the utlty functon of ndvdual consumers wth heterogeneous choces, as n fgure 3. Fgure 3: A Utlty Model wth Heterogeneous Consumers Choces Based on ordnary random utlty theory, here, E(u) captures the average expected utltes for all consumers; whle x1 and x2, etc. represent ndvdual consumers. Consumers wll have dfferent expected utltes from a gven product. For an ndvdual consumer, hs utlty functon could be expressed as: u = E( u ) + ε 2 ε N(0, δ ) Fgure 4: An Illustraton of a Value Functon Source: Tversky and Kahneman, QJE,

9 In Prospect Theory or Reference Dependent Model (Tversky and Kahneman, 1979 & 1991), the outcomes are represented by gan or loss comparng wth a neutral reference value. As shown n fgure 4, the reference value functon s an asymmetrcally S-shaped functon, whch s concave above the reference pont and convex below t. The reference value functon R s expressed as followng, u ( x ) u( r ) R ( x ) = λ *[ u( x ) u( r )] f f x r x < r Where R (.) s the reference value functon and u (.) s the utlty functon whch are all assocated wth the reference state r. The frst lne of the expresson captures the reference gan effect and the second lne captures the reference loss effect. λ s a parameter whch can be descrbed as a coeffcent of loss averson wth a restrcton that λ s greater than 1. Ths s accordng to the central assumpton of Reference Dependent Model, whch s that losses and dsadvantages have greater mpacts on preferences than gans and advantages. Let s take a look at the reference pont effects for the prce attrbute frst. Assume all the varables are constant n the utlty functon except the prce attrbute. Now the utlty functon changes to: u 2 = u0 p λploss + pgan + ε ε N(0, δ ) Where ploss captures the dfference between the reference prce and the observed prce when the observed prce s above the reference pont; pgan captures the dfference between the reference prce and the observed prce when the observed prce s below the reference pont; p s the observed prce for an ndvdual ; u 0 captures the basc utlty from consumng the product. Wth a restrcton thatλ >1, ths restrcton captures the asymmetrc 9

10 response above and below the reference pont, whch means the decson maker exhbts loss averson. For emprcal applcatons, the test of the presence of loss averson s that the estmated value of λ s sgnfcantly greater than one (Bell and Lattn, 2000). Take the health Effect (HE) attrbute as an example to show the reference dependent effects. Also assume all the varables are constant n the utlty functon except the HE attrbute, thus the utlty functon could be expressed as: u = u P + HE + HEgan λ * HEloss + ε 0 u = u P + HE + ε N(0, 2 0 ε δ ) Where u and u are the per unt utltes from consumng one unt of the functonal food () and one unt of the tradtonal food (); the correspondng prces are P and P. The parameter u 0 s a per unt base level of utlty to consume one unt of yogurt. HE and HE are the health effect attrbutes for the functonal food and the regular food. Takng HE as the reference pont and HE as the observed attrbute, HEgan captures the dfference between the reference pont and the observed attrbute when the observed attrbute s more than the reference pont, whch means HE HE >0; HEloss captures the dfference between the reference pont and the observed attrbute when the observed attrbute s less than the reference pont, whch means HE HE <0. Also wth λ >1, the utlty functon s consstent wth the evdence for loss averson. Now we can ntroduce the consumer utlty model wth reference-dependent effects. A potental framework wthn whch to apply reference-dependent effects n consumer utlty theory s a model allowng for product dfferentaton. In what follows, we draw upon Fulton & Gannakas (2004) who used a utlty model to explore the effects on consumer utlty of 10

11 labellng genetcally modfed foods. 3.1 Consumer s problem Takng a group of consumers, each one makes a choce to consume one unt of a tradtonal product (regular yogurt, ) or a functonal food product (Probotc yogurt, ). The consumers are dfferentated wth respect to a characterstc c, whch represents consumers wllng-to-pay (WTP) determned by heterogeneous consumers choce decsons based on the health effect attrbute. The consumer wth characterstc c ( c [ 0,1) ) has a utlty functon defned by: u u = u = u 0 P+ HE+ HE HE)* C *( HE HE) * 0 P + HE ( λ C The frst equaton, u, measures the utlty f one unt of functonal food has been consumed. The second equaton, u, measures the utlty f one unt of regular food has been consumed. The notaton explanatons (e.g. u 0, P, P, HE and HE ) are the same as above except for the last two tems n the frst equaton. Takng HE as the reference pont and HE as the observed attrbute, the tem (HE HE )*C represents the reference-dependent effects for the health effect gan; and the tem λ*(he HE )*C represents the reference-dependent effects for the health effect loss. Note that these two tems can not co-exst for any ndvdual consumer s utlty functon, because the consumer s wll perceve ether a health effect gan or loss from consumng functonal food. Usng fgure 5, we llustrate the consumer s problem graphcally. The consumers wth dfferent reference ponts allocated from pont s to pont r n fgure 2 correspond to consumers wth dfferent characterstcs (c) allocated from pont 0 (s) to pont 1(r) n fgure 5. 11

12 Assume ndvdual consumers are equally allocated on the horzontal axs. Fgure 5: Utlty Models wth Reference-Dependent Effects In ths fgure, 0(s) represents that consumer allocated at value 0 who takes pont s as hs reference pont. 1(r) represents a consumer allocated at value 1 who takes r as hs own reference pont. The horzontal lne U () s the utlty curve for regular food. U1 () represents the utlty functon for functonal food when there s a gan for some consumers from functonal food, whch means HE HE >0. U2 () represents the stuaton when there s a loss to all the consumers from consumng the functonal food, whch means that HE HE <0 2. At the ntersecton between U () and U1 (), the consumer stuated at pont c wll be ndfferent between regular yogurt and probotc yogurt. The consumers located to the rght of consumer c prefer probotc yogurt snce ther utlty from consumng probotc yogurt s hgher than regular yogurt; and the consumers to the left of consumer c prefer regular yogurt. 3.2 Consumer Demand Curves 1) When there s a health effect gan to consumng functonal food products, tem 2 Ths s an extreme case. Hypothetcally t could arse f there s a lack of clncal support for purported health clams, and f consumers have concerns about potental negatve long-run sde-effects for health, or there are 12

13 λ *( HE HE ) *C = 0 n the above utlty curve. Now the utlty curve wll be: U1( ) : u U ( ) : u = u = u 0 0 P P + HE + HE + ( HE HE ) * C The consumer wth characterstc c ( c : U1 = U = 1) p p c s HE HE ndfferent between consumng the functonal food and the regular food. The demand curve for the functonal product s gven by x D = c, x D = 1 p HE And the demand for the regular food s gven by. p HE x D = p HE p HE 2) When consumer beleves that there s a health effect loss to consumng functonal food products, HE HE ) *C = 0 n the utlty curve. Now the utlty curve wll be: ( U 2( ) : u = u P + HE λ *( HE U ( ) : u = u 0 0 P + HE HE ) * C If ths s the case, we can see from the fgure 5 that the utlty curve for regular food les completely above the utlty curve for the functonal food product. So the demand curve for the functonal product s gven by: D x And the demand for the regular food s gven by. D x = 0 Note that stuaton 2) s smply an extreme case of stuaton 1) (zero consumpton of = 1 functonal foods). Ths result s consstent wth economc ntuton snce usually the prce of a functonal food s hgher than ts conventonal equvalent. If consumers beleve that there problems wth allerges or drug nteractons (Brophy and Schardt, 1999). 13

14 are no health benefts from consumng functonal food, no-one wll consume functonal food gven ts prce premum, and all consumers wll choose regular food. In ths model, consumers atttudes about health effects and prces determne the market shares of functonal food and regular food. Only when consumers beleve that there are health effect gans from consumng functonal food wll the market be shared between functonal food and regular food. In the absence of perceved health benefts, the utlty functons above ndcate that there wll be no market for functonal food, whch of course s consstent wth our ntuton. 3.3 Econometrc Model for Reference Dependent Effects u β β FI β β β β β Ploss + e = P + 3FIgan + 4FIloss + 5Pgan + 6 Ths s a smple example of a random utlty functon wth reference dependent effects for functonal ngredent and prce attrbutes. The utlty of consumer to purchase mlk product s represented by u. FI s the functonal ngredent varable whch s a proxy varable of the health effect varable (HE) n the prevous theory utlty equatons and P s prce. In the emprcal work, one way to capture those reference dependent effects s by the Stated Preference Method. For the prce varable, researchers could ask the respondent queston on how much he normally pays for regular mlk, and take the perceved prce as the reference prce (Pr). Take the prce he chooses n the choce experment of the survey as the alternatve prce (Pa). Comparng Pr wth Pa, f Pa < Pr, Pgan = 1, otherwse 0; f Pa > Pr, Ploss = 1, otherwse 0; Those Pgan and Ploss dummy varables nteracted wth the prce varable could also be ncluded n the above utlty functon to capture 14

15 the nteracton effects. For the functonal ngredent varable, researchers could ask whether consumer beleves that certan functonal ngredent s normally contaned n hs regular consumed mlk product. If yes, FIr = 1, otherwse FIr =0. Use FIa =1 to represent that the respondent choose a functonal mlk n the choce experment, otherwse FIa = 0. The FIgan =1 and FIloss=0 f FIa FIr = 1; and the FIloss =1 and FIgan=0 f FIr FIa = 1, otherwse 0. A Mxed Logt Model could be used to estmate ths random utlty functon. How do consumers perceve whether there are health effect gans or losses from choosng functonal food rather than regular food? Labellng nformaton plays a key role n allowng consumers to make nformed choces. 4. Modellng Labellng Effects and Health Clams Polcy Another nterestng research queston s about how consumers obtan nformaton on the health effects of functonal food. It connects to an mportant regulatory polcy ssue whch s the health clams on food labels. Currently, Health Canada only allows fve knds of scence-based rsk reducton health clams compared wth seventeen knds of rsk reducton health clams allowed by FDA n the Unted States. The functonal food market n the Unted States was estmated about $37 bllon n Canadan consumers may be lmted and prevented from consumng more functonal foods, because of the currently more restrctve labellng polcy compared wth other countres. Currently n the Canadan market, some manufacturers use a logo or a vsual cue on the products to nform the health effect nformaton to consumers, e.g. the red heart on Omega-3 mlk to mply that the product 15

16 provdes heart health benefts. We call ths knd of logo partal labellng compared wth the health clams whch are consdered as full labellng. Because of ts attractve desgn or easy understandng of the log, t s possble that partal labellng could convey the same amount of nformaton and have the same functon as full labelng. It s also possble that full labellng could ncrease consumer demand for functonal food because of ts drect health effect clams. So let s leave ths as an emprcal research queston to be tested. Wth the growng scentfc understandng and supportng the functons of functonal ngredents n enhancng health, reducng the rsk of dseases and preventng some chronc dseases, there mght be some possbltes for the current food labelng regulatons system to revse or make some changes on the health clams of functonal food products. We know that the key characterstc to dstngush functonal food from regular food s the health effect whch could be vewed as mprovng health benefts, reducng rsk of certan dseases or dsease preventon. In the emprcal part, the above three knds of health clams wll be tested by a Stated Preference Method wth a choce experment survey among Canadan consumers. 4.1 A Comparson of Health Clams Regulaton n the U.S. and Canada In makng a decson regardng the consumpton of functonal food, consumers face two types of uncertanty: uncertanty about the health attrbutes of a specfc food and uncertanty over future health outcomes. Gven the nformaton asymmetry nherent n functonal foods, labellng nformaton plays a key role n allowng consumers to make nformed choces. Canadan current regulatons for health clams on functonal foods are relatvely restrctve relatve to a number of other countres where functonal foods are a rapdly growng segment 16

17 of the food market. The Unted States permts two types of clams: frst, a health clam whch lnks a nutrent to a partcular dsease, for example, dets rch n calcum may reduce the rsk of osteopoross, ths type of health clam must be pre-approved by the U.S. Food and Drug Admnstraton (FDA). Second, a product may carry a functon clam lnkng a substance to an effect on the functonng of the body, for example, calcum bulds strong bones. Ths type of health clams does not need pre-approval (Heller et al, 1999). Currently through the FDA s health clams regulaton system, 17 knds of health clams are allowed for functonal foods products n the Unted States. Under the current food labellng polcy n Canada, Health Canada (2003) only allows fve specfc scence-based rsk reducton clams to be used on food labels or n advertsements. The allowed health clams n Canada are the followng (Health Canada, 2003): 1. a healthy det low n sodum and hgh n potassum and reduced rsk of hgh blood pressure; 2. a healthy det wth adequate calcum and vtamn D and reduced rsk of osteopoross; 3. a healthy det low n saturated and trans fat and reduced rsk of heart dsease; 4. a healthy det rch n vegetables and frut and reduced rsk of some types of cancers; 5. the non-carogenc benefts of non-fermentable carbohydrates n gums and hard candes These are rsk reducton clams. Dsease preventon clams, lnkng consumpton of a food to the preventon of a specfc dsease, are not permtted on food products n Canada. Products clamng to treat, cure, mtgate or prevent a dsease or llness are regulated as drugs. The above fve health clams are based on ten exstng approved health clams by the Unted 17

18 States under the Nutrton Labelng and Educaton Act (NLEA) n the 1990s. Health Canada (2003) revewed those ten clams and determned that fve of them would be allowed n Canada, whle the other fve clams reman unapproved. The unapproved health clams nclude: fat and cancer; folate and neural tube defects; fber-contanng gran products, fruts, and vegetables and cancer; fruts, vegetables, and gran products that contan fber, partcularly soluble fber, and rsk of coronary artery dsease; soluble fber and rsk of coronary artery dsease. (Ftzpatrck, 2004) In the absence of labellng, the health effect of functonal food s a credence attrbute, snce the dfferences between a functonal and a regular food cannot be detected by search or experence. The relatvely restrctve labellng regulatory envronment n Canada has resulted n food companes usng other means to sgnal potental health benefts. We refer to ths as partal labellng. For example, food frms use a logo or vsual cue to mply a health beneft. Fgure 6 provdes an example - the use of a red heart mark on the product package - whch s clearly meant to mply that consumpton of the product s good for heart health. In other cases, food products contan an endorsement or healthy det recommendaton by a thrd party, such as the Canadan Dabetc Assocaton, or the Health Check program of the Heart and Stroke Foundaton. In some cases, products contan ndrect health clams that mply health benefts (e.g. Clams low n saturated and trans fat ) that requre consumers knowledge of the relatonshp between consumpton and heart dsease. In contrast, full labellng would allow drect and specfed health clams on product labels (e.g. "Calcum reduces the rsk of osteopoross."). 18

19 Fgure 6: Partal labellng example Due to the relatvely more restrctve labellng regulatory envronment n Canada, many Canadan functonal food products cannot be sold domestcally as functonal foods and tend to be exported to the Unted States, whch has a growng functonal food market estmated to be worth about $37 bllon n (Boyd, 2001) Ths also means that Canadan consumers are prevented from purchasng functonal food products that mght otherwse have been marketed n Canada. Clearly, the regulatory system needs to balance consumer protecton, and the avodance of spurous or msleadng health clams, wth the ablty for food manufacturers to communcate the health benefts of genunely benefcal functonal foods to consumers. Whle ths s a dffcult balance, the fact remans that far fewer health clams are allowed n Canada relatve to other countres, and the range of functonal food products on the market s therefore more lmted. 4.2 Econometrc Model for Labellng Effects and Choce Experment u = β + β GHC + β FIgan β FIloss 8 + β RRHC 2 + β Pgan 9 + β DPHC 3 + β Ploss 10 + β PartalL 4 + e + β FI 5 + β P 6 Ths random utlty functon s developed from the prevous utlty functon n secton three, whch has been added n the labellng effects varables. Where the GHC varable represents the functonal or structure health clams, the RRHC s the rsk reducton health 19

20 clams varable and the DPHC s the dsease preventon health clams varable. By conductng a choce experment n the survey, the data could be collected for the above estmaton equaton. One usual way for consumers to obtan nformaton of health effects of functonal food s by health clams on product s labels. Accordng to Reference-Dependent Model, people mght reverse ther preferences on dfferent health clams by consderng the health effect as a gan or to avod a loss, e.g. a consumer may prefer an omega 3 mlk product f t s clamed as reducng the rsk of cardovascular dseases (health loss avodance) rather than clamed as general heart health mantenance. A change n the labellng nformaton through dfferent types of health clams mght change consumers reference ponts for the health effect attrbute, thereby alterng ther preferences for functonal food. Gven the mportance of labellng and nformaton asymmetry n understandng the consumer decson-makng process for functonal foods, the effect of dfferent labellng strateges wll be examned n the future emprcal work; n partcular, whether dfferent labellng polces could offer suffcent nformaton to change consumers reference ponts and thus reduce consumer heterogenety. 5. Concluson and Future Research Ths paper ncorporated reference-dependent theory from the psychology lterature nto a model of consumers decson makng for functonal dary products. It focused on the reference-dependent effects when consumers make choces, showng how changes n reference ponts could change ndvduals preferences, and whether labellng could offer suffcent nformaton to change consumers preferences. The effect of dfferent labellng polces on the health clams attrbute s of nterest, partcularly when we compare a partal 20

21 labellng scenaro wth that of full labellng. Ths paper provdes a bass for future emprcal analyss of the demand for functonal food under dfferent labellng stuatons. In partcular, emprcal analyss could assess whether there are reference-dependent and labellng effects for both health effects and health clams attrbutes for Canadan consumers of functonal food; how consumers react to full labellng versus partal labellng, and the extent to whch ths may reduce consumer heterogenety. There are three maor varables n the model: Health Effects, Health Clams Labellng and Prce. A related area for future study s to determne what factors could change consumers reference ponts for the Health Effects and Health Clams varables. An ntal assessment suggests that there are at least three possble factors that could change consumers reference ponts: consumer s current and antcpated future health status, the credblty of labellng clams, and how much effort consumers put nto readng labels. Further research could examne these factors, as well as determne how they could be nfluenced by publc nformaton campagns, or by an ndustry assocaton through generc advertsng targetng the health benefts of, for example, functonal dary products. 21

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