The Case of Washington Apples

Reputation & Consumer Response to the "Washington Apple" Label

Project Director: Jill McCluskey, Washington State University
Post Doctoral Researcher: Kwamena Quagrainie, now Asst. Prof., Univ. of Arkansas, Pine Bluff.
Collaborator: Maria Loureiro, Colorado State University

Project Description

Although this project is now finished, we will continue to study the effect of labeling and commodity promotion on product reputation. We plan to continue working to publish the results in academic journals and disseminate the results through the project's website. (http://www.ses.wsu.edu/research/projects/apple.htm)

State promotions of different commodities are a popular marketing strategy to differentiate products in order to enhance states' agricultural product sales. Early state promotion efforts include Washington apples, Florida citrus, and Idaho potatoes. The reputation of state products plays an important role signaling the product quality. For policy purposes, it is important to determine how state promotions affect a product's collective reputation. This research uses a revealed preference approach to analyze consumer response to the "Washington Apple" program and its effect on the collective reputation of the product.

We analyze the reputation of Washington apples using five major varieties of apples grown in Washington, i.e., Fuji, Gala, Golden Delicious, Granny Smith, and Red Delicious. Testable hypotheses are that lagged reputation and the "Washington Apple" logo have no effect on current reputation. Average monthly price premiums and marketing data are utilized in the study. The objectives are achieved using a two-step dynamic multiple-indicator multiple-cause (MIMIC) modeling approach (Joreskog and Goldberger), which is a special case of the general latent variable modeling scheme called "state-space" models. Since the second step of the procedure is similar to the hedonic price technique, that approach is also applied. As a second alternative technique, generalized maximum entropy is used to recover unknown parameters and the unobservable state variable, reputation and its effect on price.

Although the primary purpose of this investigation is to quantify reputation and understand its effect over time, a secondary contribution of this study is that it extends the existing literature on produce marketing, specifically the marketing of Washington apples. Another contribution is the introduction of dynamics into the MIMIC framework, which is a significant departure from almost all the previous work on modeling latent structures.

Specific Aims

to determine the effect of product reputation and labels on demand;
to analyze the importance of state promotions and product quality on reputation; and
to estimate the reputation of Washington apples over time.

Findings

Results from the first stage of the estimation procedure in the MIMIC reputation model suggest that price premiums are good indicators of reputation. The indicator coefficients, also called factor loadings, imply that the estimated reputation variable is common to the five indicators chosen and that the measurement of reputation is not likely to be obscured by a wide diversity in the indicators. The common factor issue suggests a possible existence of collective 'Washington' reputation.

Results from the second stage of the MIMIC reputation model are compared to those from the Hedonic proxy model. In general, results from the MIMIC reputation model make more intuitive sense and are in line with the theoretical literature on reputation than the results from the Hedonic proxy model. Reputation is found to be stationary and shocks to Washington's reputation are temporary. In the MIMIC reputation model, all the estimated coefficients on the explanatory cause variables had positive signs, except the Red Delicious variety variable. The magnitude of the coefficient on the logo term is large, suggesting a strong impact on reputation. The estimated constant term in the MIMIC reputation model is negative and relatively large, which suggests that reputation is declining. Finally, the results from the generalized maximum entropy analysis are consistent with the results from the MIMIC approach.

Implications for the Apple Industry

The concerns of declining perceived "eating" quality in Washington varieties thus appear to be real. It appears that the apple industry is currently benefiting from past/accrued reputation. The current standards in the apple industry give room for some Washington producers to free ride on the collective reputation. Hence, there may be some justification for minimum quality standards. For efficient public policy purposes, these findings suggest that policymakers and the apple industry as a whole should consider reputation in their cost-benefit analysis for purposes of resource allocation.

This work was supported by the NRI Competitive Grant Program/USDA No. 0001853.

Below is a PowerPoint File of a presentation of our work that was presented at the 2001 AAEA meetings. You will need to have PowerPoint to be able to view this file.

Reputation and State Product Logos: The Case of Washington Apples, by Kwamena K. Quagrainie, Jill J. McCluskey, and Maria L. Loureiro

Publications

Quagrainie, Kwamena K., Jill J. McCluskey, and Maria L. Loureiro, forthcoming April 2003. A Latent Structure Approach to Measuring Reputation, Southern Economic Journal 67(4).

Quagrainie, K., J.J. McCluskey, and M.L. Loureiro. Reputation and State Product Logos, selected paper presented at the 2001 American Agricultural Economics Association meetings, Chicago (abstract: http://wwwagecon.lib.umn.edu)

Loureiro, M.L. and J.J. McCluskey. Reputation Dynamics of the "Washington Apple" Label, selected paper presented at the 2000 Western Agricultural Economics Association meetings in Vancouver, Canada (abstract: Journal of Agricultural and Resource Economics 25(2):2000).