The Economics of Ecolabelling - SEAFOOD Ecolabelling: Principles and Practice - page 40

2.2 The economics of consumer demand for

ecolabelled products

2.2.1 The theoretical foundation: economics of information

The underlying economic theory for labelling products can be traced back to
Stigler's (1961) work on the economics of information, who first presents informa-
tion as a valuable resource. However, information is recognised as a resource which
comes with a cost - the cost of searching. Stigler focuses in particular on the search
for a product with the lowest market price, where that 'search cost' is attributable
to time and energy expended by the consumer in determining which seller offers
product at the lowest price. The higher valued the good is, the greater the benefit
of searching; conversely, the higher one's income, the higher the opportunity cost
of searching for the lowest-priced seller. According to Stigler, a consumer searches
for information until the marginal benefit of additional information is equal to
the marginal cost of obtaining the additional information. As a result, there is a
willingness to pay for information, and a marginal cost of obtaining it.
Nelson (1970, 1974) expanded on this topic by looking at the difficulty of deter-
mining product quality in the market, which is even greater than that of determining
price levels, since information about quality is usually more difficult to obtain than
price. In addition, since it is often impossible for buyers to determine the difference
between good products and bad products, there are incentives for sellers to promise
high-quality products but market poor-quality products, as pointed out by Akerlof
(1970). Nelson distinguished between two types of products, 'search goods' and
'experience goods'. Search goods are those with attributes that can be determined
by searching, where for seafood, for example, these attributes might be defined as
price, colour, or smell. Experience goods are those for which the quality may be
discerned by, for seafood, experiencing the taste or ease of preparation.
Search and experience goods may be advertised by producers to provide con-
sumers with information. This will lower the consumer's search costs. Search char-
acteristics, which can be readily checked by the consumer before purchase, are
hypothetically the most accurately advertised. The producer elects to undertake
the advertising as long as this is a means to increase market share. Consumers'
acceptance of producers' claims will vary by the nature of the characteristic ad-
vertised, since producers will generally disclose only information advantageous to
them. This competitive disclosure process results in explicit claims for all positive
aspects of goods, and causes consumers to be suspicious of goods without claims
(Aldrich 1999). Credibility of the producer will affect consumers' acceptance of the
claims, but ultimately consumers' experience with product quality will determine
repeat purchases.
Darby and Karni (1973) expand the categorisation of goods to include 'credence
goods'. Consumers cannot determine the quality of credence goods even after they