When Consumers Speak

I spent the past week teaching managerial economics in a new masters of agribusiness and entrepreneurship program at Agricultural University-Plovdiv. It was a good opportunity to reinforce (or in some cases introduce) an understanding of property rights and of the role of markets not just to coordinate resources but to elicit, reveal and transmit knowledge throughout the economy. (It was also somewhat apropos that the class ended on the 25th anniversary of the fall of the Berlin wall, and Nov 10 is Bulgaria’s anniversary of the end of Communist control.)

One of the issues we discussed was the sensitivity of many Bulgarians (and Europeans in general) to things like genetically modified organisms (GMOs) in the food supply and the use of antibiotics and growth-stimulating hormones in meat and dairy. We discussed differences in attitudes between consumers in the US (in general) and in Europe, and differences among consumers in the US. We discussed alternate ways of responding to those sensitivities–whether government-imposed regulations or privately-organized initiatives in response to consumer demands. So news this week from the US provided two very timely examples.

First, voters in Colorado and Oregon rejected initiatives to force food manufacturers to label foods containing GM ingredients. It’s impossible to infer the exact reason consumers voted this way (though it’s important to understand, as pointed out here). Perhaps they did not believe the scare tactics of opponents of GM foods. Perhaps they understood that such labels are superfluous when food producers already have the freedom to label their products in response to consumer interests (e.g., labelling GM-free products). Perhaps consumers simply thought the regulation would increase the costs of food and they didn’t value the information of the label enough to incur higher food costs. In any case, consumers voted–at the ballot box–to continue to let the market provide information about GM-foods based on consumer demand for that information rather than government-imposed regulation.

Later in the week, Cargill announced that it was going to start offering antibiotic-free turkeys in response to consumers who have concerns about antibiotics in the meat they eat. Concern about antibiotics isn’t new, but up to this point Cargill obviously didn’t believe there were enough consumers wanting this product characteristic to warrant the cost of changing their production systems. The news release said Cargill would be training 700 farmers to raise turkeys without the use of antibiotics. That’s a nontrivial expense in itself, much less any additional costs associated with veterinary care, monitoring of flocks, or increased flock mortality rates that might result. This time, consumers voted both with their voices and their spending habits to signal to producers that there is demand for a product that producers may be able to meet at a sufficiently low cost to make it worthwhile. In this way, Cargill’s decision to supply antibiotic-free turkey is akin to producers who have decided to pay to maintain GM-free supplies and market their products to concerned consumers.

These were great examples for this group of Bulgarian food producers and agribusiness managers. Cultural differences in demand for food products and food attributes will always necessitate different kinds of products and different ways of organizing the value chain to deliver them. Understanding the information-gathering role of the market and its ability to coordinate resources and stimulate innovation was perhaps the most important lesson we covered. The entrepreneurial challenge is how to use and respond to the information the market reveals in a way that creates value for consumers and captures value for the entrepreneur.