Monday, May 17, 2010

Information and Markets, Pork Chop Edition

In The Omnivore's Dilemma by Michael Pollan, a thought-provoking book, I came across this.

The fact that the nutritional quality of a given food (and of that food's food) can vary not just in degree but in kind throws a big wrench into an industrial food chain, the very premise of which is that beef is beef and salmon salmon. It also throws a new light on the whole question of cost, for if quality matters so much more than quantity, then the price of a food may bear little relation to the value of the nutrients in it ... As long as one egg looks pretty much like another, all the chickens like chicken, and beef beef, the substitution of quantity for quality will go unnoticed by most consumers...
Sounds like Akerloff's information asymmetry to me.

I have in the past conflated this type of information asymmetry, where lack of knowledge of quality drives high-quality items out of the market, with Gresham's Law, where a government requirement to accept unequal things as equal (such as silver and gold coinage) drives the more valuable out of the market. My bad. In both cases the bad drives out the good, but for different reasons.

Pollan's book, in addition to the above Lemon problem, also cites what I think is an example of Gresham's Law: the USDA definition of the word "Organic" conflates many farming practices but none entirely, allowing the least-common-denominator to appropriate the word in the marketplace. Perhaps this sort of informational hollowing-out is inevitable in marketplaces because of information friction. But what happens when information friction comes way down?

It's interesting to think about the different possible trade-offs:
[M]any consumers don't aim for such purity — particularly if they know that the meat is being raised ethically and in an environmentally sound manner. Many hog farmers raising animals according to various “natural” standards have found that customers come back once they learn about the practices each farm employs, even if they are not certified organic.

The 12-year-old Niman Ranch uses a network of small farms certified by the Animal Welfare Institute. They may feed hogs nonorganic corn, but otherwise meet USDA organic standards, said Paul Willis, a founder and director of pork for Niman Ranch, and the extra expense isn't worth the “piece of paper” that would certify his farming practices.

He compared his Iowa farm — a 20-acre pasture on 900 acres and 2,000 hogs — to an industrial farm down the road that has 6,000 pigs inside a building of no more than a couple acres. He composts pig manure on his fields, unlike his neighbor, who pumps thousands of gallons of liquid waste underground, where it can leach into the Iowa River.

His customers know his standards, and buy even [though] he doesn't have the “organic” label. “I guess,” Willis said, “it comes right down to how much of a purist you want to be.”

Niman Farms has invested in a brand name to communicate its practices to its customers. But the cost of building a brand is more than the cost of being organic, so many farms decide to be certified Organic instead. This is the marketing tradeoff: build a brand or commoditize.

The alternative, letting the customers bear the expense of finding a product that matches their particular needs, is too high: the vast majority of customers in most markets have such a large overlap of requirements that search costs are more efficiently borne by the seller.

But online, the search cost is the expense of tweaking the buying algorithm. This argues that, unlike many traditional markets, online markets should supply more information that can be used to determine quality and less commoditization.

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Other posts in this series:
Information and Markets, 1
Information and Markets, 2
Information and Markets, 3

6 comments:

Greg Hills said...

Yes, food information is interesting stuff.

Metadata on food, be it calorie counts in restaurants or more detailed nutrition information on packaging, is regulated by the government. Of course any taxonomy where labels have rigid, meaningful definitions -- i.e. "organic" means something specific" -- can't be flexible enough to be extremely helpful in describing the range of differentiated products in a dynamic market place.

In the Omnivore's Dilemma, you see consumers respond to this information gap by building one to one relationships with producers, flattening the supply chain with farmer's markets and community food cooperatives. Shaking hands with the farmer himself and building a personal relationships establishes more trust than anything you write on a package.

Right now, advertising's supply chain is flattening, but unlike with food, that trusted personal relationship is being taken out of the equation at the same time. More and more transactions are mediated by electronic markets. So the value of building a trusted brand, like Niman Ranch, seems more valuable than ever in the advertising technology market.

Jerry Neumann said...

Interesting take away. The one-to-one relationship obviously destroys some of the efficiencies that have taken our average food expense from more than 40% of our income a century ago to less than 13% today, giving us all extra money to spend on things like education and healthcare (and flatscreen TVs.) Rolling that back seems like a problem, although it's hard to know how much of the efficiencies are in search costs vs. other things.

Similarly, buying media solely by brand seems like going backwards, even though this is how it is still done most of the time.

Jonathan Mendez said...

My takeaway is that unless publishers get useful audience and performance data onto the exchanges premium & secondary inventory will get flushed out of the market by exchange buying until the point we get premium & secondary exchanges? Oh, and keep the IAB out of it. Did I get it? :)

Jerry Neumann said...

I'm not sure what you just said, but you definitely get it.

Farmstead said...

Yes, online markets should have more information, but for food, that information needs to be made available at the point of sale. Whether that is mobile applications, pos materials, kiosks or farmer's market style dialogue, the information needs to travel with the food. Labels fail due to both political and information constraints. The additional strength of an internet database as a piece of the solution is the potential to make brand building as cost effective as commoditizing.

Jerry Neumann said...

Completely agree. I was wishing the other day to somehow be able to connect something like RedLaser to a database/algorithm that would help me figure out which of several products would be healthier for my kids. Scan the barcode with my iPhone and it would tell me better alternatives. I think there's a ton to be done in that vein.