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 profit-maximizing 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 outcomes). 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.