This short lecture was delivered at the "Shopping for Health" workshop sponsored by the University of Washington in May 2010. The working paper referenced on slide 2 has since been published, and is available for download here: http://www.business.otago.ac.nz/econ/Personal/ts_files/invisible.pdf

1. Supply & Demand
A Lemons Revolution
Making Lemonade
Dietary Choice and the Economics of Information
“Hidden quality” in the history of American food
Trenton G. Smith
Assistant Professor
Washington State University
School of Economic Sciences
May 7, 2010
Trent Smith Demand for Healthy Foods: The Role of Information 1

2. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
Supply-side Explanations
Demand-side Explanations
Trent Smith Demand for Healthy Foods: The Role of Information 2

3. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
Supply-side Explanations
scarcity of land (price, availability) for large supermarkets
smaller/independent stores lack access to supply chain
Demand-side Explanations
Trent Smith Demand for Healthy Foods: The Role of Information 2

4. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
Supply-side Explanations
scarcity of land (price, availability) for large supermarkets
smaller/independent stores lack access to supply chain
Demand-side Explanations
time cost (one-stop shopping...car required?)
income levels
stress/income insecurity
education levels/nutritional literacy/access to information
Trent Smith Demand for Healthy Foods: The Role of Information 2

5. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
Supply-side Explanations
scarcity of land (price, availability) for large supermarkets
smaller/independent stores lack access to supply chain
Demand-side Explanations
time cost (one-stop shopping...car required?)
income levels
stress/income insecurity
education levels/nutritional literacy/access to information
Overall: trends working against access.
Trent Smith Demand for Healthy Foods: The Role of Information 2

6. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
Supply-side Explanations
scarcity of land (price, availability) for large supermarkets
smaller/independent stores lack access to supply chain
Demand-side Explanations
time cost (one-stop shopping...car required?)
income levels
stress/income insecurity
education levels/nutritional literacy/access to information
Overall: trends working against access.
(My interest: demand-side emphasis)
Trent Smith Demand for Healthy Foods: The Role of Information 2

7. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
Supply-side Explanations
scarcity of land (price, availability) for large supermarkets
smaller/independent stores lack access to supply chain
Demand-side Explanations
time cost (one-stop shopping...car required?)
income levels
stress/income insecurity
education levels/nutritional literacy/access to information
Overall: trends working against access.
(My interest: demand-side emphasis)
Today: Role of information in history of U.S. retail market.
Trent Smith Demand for Healthy Foods: The Role of Information 2

8. Supply & Demand
A Lemons Revolution
Making Lemonade
Why Doesn’t the Market Deliver Healthy Foods to Poor Urban Areas?
School of Economic Sciences
Working Paper Series
WP 2009-07
WAITING FOR THE INVISIBLE
HAND:
Market Power and Endogenous Information in the
Modern Market for Food
By
Trenton G. Smith, Hayley H. Chouinard
and Philip R. Wandschneider
February 2009
Today: Role of information in history of U.S. retail market.
Trent Smith Demand for Healthy Foods: The Role of Information 2

9. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Revolution at the Table: A National Market is Born
Between 1880 and 1930, a series of innovations transformed
the American diet (Levenstein 1988).
Trent Smith Demand for Healthy Foods: The Role of Information 3

10. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Revolution at the Table: A National Market is Born
Between 1880 and 1930, a series of innovations transformed
the American diet (Levenstein 1988).
1 The advent of railroads made it possible to efficiently transport
goods over long distances.
Trent Smith Demand for Healthy Foods: The Role of Information 3

11. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Revolution at the Table: A National Market is Born
Between 1880 and 1930, a series of innovations transformed
the American diet (Levenstein 1988).
1 The advent of railroads made it possible to efficiently transport
goods over long distances.
2 Newly developed technologies (notably: meatpacking, canning,
pasteurization, milling, sugar refining, and hydrogenation)
made it possible to mass-produce foods that could withstand
extended storage and shipment.
Trent Smith Demand for Healthy Foods: The Role of Information 3

12. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Revolution at the Table: A National Market is Born
Between 1880 and 1930, a series of innovations transformed
the American diet (Levenstein 1988).
1 The advent of railroads made it possible to efficiently transport
goods over long distances.
2 Newly developed technologies (notably: meatpacking, canning,
pasteurization, milling, sugar refining, and hydrogenation)
made it possible to mass-produce foods that could withstand
extended storage and shipment.
3 Newly popular national magazines made it possible to widely
advertise new products to middle class households.
Trent Smith Demand for Healthy Foods: The Role of Information 3

13. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Revolution at the Table: A National Market is Born
Between 1880 and 1930, a series of innovations transformed
the American diet (Levenstein 1988).
1 The advent of railroads made it possible to efficiently transport
goods over long distances.
2 Newly developed technologies (notably: meatpacking, canning,
pasteurization, milling, sugar refining, and hydrogenation)
made it possible to mass-produce foods that could withstand
extended storage and shipment.
3 Newly popular national magazines made it possible to widely
advertise new products to middle class households.
The result was a dramatic shift from local and regional
markets to a national market...
Trent Smith Demand for Healthy Foods: The Role of Information 3

14. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Revolution at the Table: A National Market is Born
Between 1880 and 1930, a series of innovations transformed
the American diet (Levenstein 1988).
1 The advent of railroads made it possible to efficiently transport
goods over long distances.
2 Newly developed technologies (notably: meatpacking, canning,
pasteurization, milling, sugar refining, and hydrogenation)
made it possible to mass-produce foods that could withstand
extended storage and shipment.
3 Newly popular national magazines made it possible to widely
advertise new products to middle class households.
The result was a dramatic shift from local and regional
markets to a national market...
...and a concomitant shift in the composition of the typical
diet away from traditional, freshly prepared foods and toward
a diet composed largely of highly processed, packaged foods
and ingredients.
Trent Smith Demand for Healthy Foods: The Role of Information 3

15. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
The Jungle: Hidden Quality Revealed
There were many advantages to the new industrial food
system...
Trent Smith Demand for Healthy Foods: The Role of Information 4

16. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
The Jungle: Hidden Quality Revealed
There were many advantages to the new industrial food
system...
...but an important consequence soon became apparent:
The consumer could no longer see how his foods were
handled and processed. In economics we call this an
asymmetric information or “hidden quality” problem.
Trent Smith Demand for Healthy Foods: The Role of Information 4

17. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
The Jungle: Hidden Quality Revealed
There were many advantages to the new industrial food
system...
...but an important consequence soon became apparent:
The consumer could no longer see how his foods were
handled and processed. In economics we call this an
asymmetric information or “hidden quality” problem.
A dramatic example of this phenomenon came to light in
1906, with publication of Upton Sinclair’s The Jungle.
Trent Smith Demand for Healthy Foods: The Role of Information 4

18. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
The Jungle: Hidden Quality Revealed
There were many advantages to the new industrial food
system...
...but an important consequence soon became apparent:
The consumer could no longer see how his foods were
handled and processed. In economics we call this an
asymmetric information or “hidden quality” problem.
A dramatic example of this phenomenon came to light in
1906, with publication of Upton Sinclair’s The Jungle.
A bestseller, The Jungle told the sordid tale of the
newly-arisen meatpacking industry in Chicago.
Its vivid descriptions of conditions in the plants
turned America’s stomach.
Trent Smith Demand for Healthy Foods: The Role of Information 4

19. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
The Jungle: Hidden Quality Revealed
There were many advantages to the new industrial food
system...
...but an important consequence soon became apparent:
The consumer could no longer see how his foods were
handled and processed. In economics we call this an
asymmetric information or “hidden quality” problem.
A dramatic example of this phenomenon came to light in
1906, with publication of Upton Sinclair’s The Jungle.
A bestseller, The Jungle told the sordid tale of the
newly-arisen meatpacking industry in Chicago.
Its vivid descriptions of conditions in the plants
turned America’s stomach.
Congress responded with 1906 Meat Inspection Act and
Pure Food and Drug Act.
Trent Smith Demand for Healthy Foods: The Role of Information 4

20. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
A Lemons Market
Problems with food safety in the new national food market
were entirely predictable.
Trent Smith Demand for Healthy Foods: The Role of Information 5

21. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
A Lemons Market
Problems with food safety in the new national food market
were entirely predictable.
Economic theory predicts that when it is difficult for buyers to
assess product quality (used cars, processed foods...), a
“lemons equilibrium” can result, in which only the
lowest-quality goods are sold (Akerlof 1970).
Trent Smith Demand for Healthy Foods: The Role of Information 5

22. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
A Lemons Market
Problems with food safety in the new national food market
were entirely predictable.
Economic theory predicts that when it is difficult for buyers to
assess product quality (used cars, processed foods...), a
“lemons equilibrium” can result, in which only the
lowest-quality goods are sold (Akerlof 1970).
While market-based responses (consumer defensive measures,
price premiums for reputable sellers...) can partially resolve
this problem, sometimes it is necessary to establish a system
of credible standards or certifications (e.g., 1906 legislation).
Trent Smith Demand for Healthy Foods: The Role of Information 5

23. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
A Lemons Market
Problems with food safety in the new national food market
were entirely predictable.
Economic theory predicts that when it is difficult for buyers to
assess product quality (used cars, processed foods...), a
“lemons equilibrium” can result, in which only the
lowest-quality goods are sold (Akerlof 1970).
While market-based responses (consumer defensive measures,
price premiums for reputable sellers...) can partially resolve
this problem, sometimes it is necessary to establish a system
of credible standards or certifications (e.g., 1906 legislation).
Ironically, concerns over food safety in 1900s drove consumers
toward new proprietary processed foods, which were generally
thought to be (and aggressively promoted as) healthier and
more hygienic than traditionally prepared foods.
Trent Smith Demand for Healthy Foods: The Role of Information 5

24. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
A Lemons Market
Problems with food safety in the new national food market
were entirely predictable.
Economic theory predicts that when it is difficult for buyers to
assess product quality (used cars, processed foods...), a
“lemons equilibrium” can result, in which only the
lowest-quality goods are sold (Akerlof 1970).
While market-based responses (consumer defensive measures,
price premiums for reputable sellers...) can partially resolve
this problem, sometimes it is necessary to establish a system
of credible standards or certifications (e.g., 1906 legislation).
Ironically, concerns over food safety in 1900s drove consumers
toward new proprietary processed foods, which were generally
thought to be (and aggressively promoted as) healthier and
more hygienic than traditionally prepared foods.
Decades would pass before nutrition scientists would identify
impacts of processing on health outcomes.
Trent Smith Demand for Healthy Foods: The Role of Information 5

25. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Processing & Nutrition: Infant Foods, 1869–1930
1869: Liebig’s Soluble Food for Babies
introduced. Many others followed.
Trent Smith Demand for Healthy Foods: The Role of Information 6

26. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Processing & Nutrition: Infant Foods, 1869–1930
1869: Liebig’s Soluble Food for Babies
introduced. Many others followed.
1890: Promoted as superior to breast milk
(via magazine ads, free samples, pamphlets),
use of proprietary infant foods widespread.
Trent Smith Demand for Healthy Foods: The Role of Information 6

27. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Processing & Nutrition: Infant Foods, 1869–1930
1869: Liebig’s Soluble Food for Babies
introduced. Many others followed.
1890: Promoted as superior to breast milk
(via magazine ads, free samples, pamphlets),
use of proprietary infant foods widespread.
1911: Pediatrics editorializes about the
“sinister coincidence” of infant mortality among
babies fed exclusively on these foods. Notes
ongoing epidemics of infantile scurvy and
rickets. Few mothers get the message.
Trent Smith Demand for Healthy Foods: The Role of Information 6

28. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Processing & Nutrition: Infant Foods, 1869–1930
1869: Liebig’s Soluble Food for Babies
introduced. Many others followed.
1890: Promoted as superior to breast milk
(via magazine ads, free samples, pamphlets),
use of proprietary infant foods widespread.
1911: Pediatrics editorializes about the
“sinister coincidence” of infant mortality among
babies fed exclusively on these foods. Notes
ongoing epidemics of infantile scurvy and
rickets. Few mothers get the message.
1930s: Vitamins now quantifiable in food.
Processing shown to degrade vitamins.
Producers turn to fortification.
Trent Smith Demand for Healthy Foods: The Role of Information 6

29. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Hidden Qualities Revealed
Early history of proprietary infant foods is not an anomaly.
Typical pattern follows:
Trent Smith Demand for Healthy Foods: The Role of Information 7

30. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Hidden Qualities Revealed
Early history of proprietary infant foods is not an anomaly.
Typical pattern follows:
1 Novel food product/process widely adopted, thought to be
healthier/safer than traditional food.
Trent Smith Demand for Healthy Foods: The Role of Information 7

31. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Hidden Qualities Revealed
Early history of proprietary infant foods is not an anomaly.
Typical pattern follows:
1 Novel food product/process widely adopted, thought to be
healthier/safer than traditional food.
2 Decades pass before scientific consensus identifies dangers.
Trent Smith Demand for Healthy Foods: The Role of Information 7

32. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Hidden Qualities Revealed
Early history of proprietary infant foods is not an anomaly.
Typical pattern follows:
1 Novel food product/process widely adopted, thought to be
healthier/safer than traditional food.
2 Decades pass before scientific consensus identifies dangers.
3 Years pass before legislation/technology solve the problem.
Trent Smith Demand for Healthy Foods: The Role of Information 7

33. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Hidden Qualities Revealed
Early history of proprietary infant foods is not an anomaly.
Typical pattern follows:
1 Novel food product/process widely adopted, thought to be
healthier/safer than traditional food.
2 Decades pass before scientific consensus identifies dangers.
3 Years pass before legislation/technology solve the problem.
(see: canning, milling, pasteurization, trans-fats, phytochemicals,
glycemic effects...)
Trent Smith Demand for Healthy Foods: The Role of Information 7

34. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Hidden Qualities Revealed
Early history of proprietary infant foods is not an anomaly.
Typical pattern follows:
1 Novel food product/process widely adopted, thought to be
healthier/safer than traditional food.
2 Decades pass before scientific consensus identifies dangers.
3 Years pass before legislation/technology solve the problem.
(see: canning, milling, pasteurization, trans-fats, phytochemicals,
glycemic effects...)
The final step in this process also follows a pattern, as
illustrated by the national campaign for new food standards in
the 1930s.
Trent Smith Demand for Healthy Foods: The Role of Information 7

35. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Food Fight: Canners Debate, 1933–1938
1933: Concern about quality/safety of canned foods leads
Dept. of Agriculture to propose quality grading system
(A, B, C...) reflecting integrity of product.
Trent Smith Demand for Healthy Foods: The Role of Information 8

36. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Food Fight: Canners Debate, 1933–1938
1933: Concern about quality/safety of canned foods leads
Dept. of Agriculture to propose quality grading system
(A, B, C...) reflecting integrity of product.
Coalition of small regional canners and consumer
groups favor strong new tiered grading system, push
for passage.
Trent Smith Demand for Healthy Foods: The Role of Information 8

37. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Food Fight: Canners Debate, 1933–1938
1933: Concern about quality/safety of canned foods leads
Dept. of Agriculture to propose quality grading system
(A, B, C...) reflecting integrity of product.
Coalition of small regional canners and consumer
groups favor strong new tiered grading system, push
for passage.
Coalition of large national-brand canners and national
magazines advocate against, push for single
minimum-quality standard.
Trent Smith Demand for Healthy Foods: The Role of Information 8

38. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Food Fight: Canners Debate, 1933–1938
1933: Concern about quality/safety of canned foods leads
Dept. of Agriculture to propose quality grading system
(A, B, C...) reflecting integrity of product.
Coalition of small regional canners and consumer
groups favor strong new tiered grading system, push
for passage.
Coalition of large national-brand canners and national
magazines advocate against, push for single
minimum-quality standard.
1938: Congress passes Food, Drug, and Cosmetic Act of
1938, without tiered grading system.
Trent Smith Demand for Healthy Foods: The Role of Information 8

39. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Food Fight: Canners Debate, 1933–1938
1933: Concern about quality/safety of canned foods leads
Dept. of Agriculture to propose quality grading system
(A, B, C...) reflecting integrity of product.
Coalition of small regional canners and consumer
groups favor strong new tiered grading system, push
for passage.
Coalition of large national-brand canners and national
magazines advocate against, push for single
minimum-quality standard.
1938: Congress passes Food, Drug, and Cosmetic Act of
1938, without tiered grading system.
Again, positions reflect economic interests: Nationally advertised brands
‘mediocre quality’ but owned the market; credible quality grades would
bring price competition, free consumer from reliance on brand reputation.
Trent Smith Demand for Healthy Foods: The Role of Information 8

40. Supply & Demand The Jungle
A Lemons Revolution Processing Processing
Making Lemonade Food Fight
Food Fight: Canners Debate, 1933–1938
1933: Concern about quality/safety of canned foods leads
Dept. of Agriculture to propose quality grading system
(A, B, C...) reflecting integrity of product.
Coalition of small regional canners and consumer
groups favor strong new tiered grading system, push
for passage.
Coalition of large national-brand canners and national
magazines advocate against, push for single
minimum-quality standard.
1938: Congress passes Food, Drug, and Cosmetic Act of
1938, without tiered grading system.
Again, positions reflect economic interests: Nationally advertised brands
‘mediocre quality’ but owned the market; credible quality grades would
bring price competition, free consumer from reliance on brand reputation.
History repeats: 1973 imitation rule, organic standards, meat inspection,
labeling. ‘Lemons’ problem persists, advocates say ‘opt out.’
Trent Smith Demand for Healthy Foods: The Role of Information 8

41. Supply & Demand
A Lemons Revolution
Making Lemonade
If life gives you Lemons...
History (and economic theory) suggest huge unmet
demand for higher-quality, nutritious foods.
Trent Smith Demand for Healthy Foods: The Role of Information 9

42. Supply & Demand
A Lemons Revolution
Making Lemonade
If life gives you Lemons...
History (and economic theory) suggest huge unmet
demand for higher-quality, nutritious foods.
In the absence of a strong national policy response,
larger market failure provides opportunity for change
locally. Urban ‘food deserts’ are a prime target.
quality/reputation as a profit center
role for local health departments
coalition of consumer and small/local producer
consumer outreach/education, fostering of new
local food culture
Trent Smith Demand for Healthy Foods: The Role of Information 9