A Game Theoretic Approach to Organic Foods: An Analysis of Asymmetric Information and Policy
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Demand for healthy, safe, and environmentally friendly food products has been
increasing. In response, producers are marketing organic and other quality-differentiated
foods, sometimes claiming to have followed sound environmental and animal welfare
practices. These products frequently have unobservable quality attributes. If the profitmaximizing
producer is able to deceive the consumer with a false claim, then he or she
will enjoy a higher price with lower production costs (compared to the full disclosure
outcome). The analysis described in this paper shows that repeat-purchase relationships
and third-party monitoring are required for high-quality credence goods to be available.
Policy implications of this analysis for national organic food standards are discussed.