Creating cracks in consumer confidence

Associate Professor Samuel Becher and Dr Hongzhi Gao examine how the act of mislabelling products and undercutting consumer trust may have a spillover effect.

image of eggs
The egg-farming industry should probably consider introducing more co-ordinated measures to ensure the authenticity of free-range and other similar labels.

Xue (Frank) Chen, a west Auckland egg farmer, has been charged by the Commerce Commission with illegally selling millions of caged eggs as free-range.

Free-range eggs carry a great value for many consumers, who are willing to pay a premium price for them. At the same time, this presents businesses with a strong economic incentive to misbehave. The potential to mislead consumers while making claims that consumers will find hard to verify and evaluate—credence qualities, in economic jargon—is big.

Hence, the Commerce Commission’s focus on the economic loss that consumers suffered due to such mislabelling is understandable and natural. Yet, it captures merely a very limited part of a more nuanced and complex reality. Indeed, there’s more to this case than initially meets the eye.

First and foremost, trust—which is a fundamental component in modern societies—is embedded in ‘free-range eggs’ statements. Trust is essential for the proper functioning of markets. It benefits consumers, traders, markets and society more generally.

Where consumers trust sellers’ statements, their need to take precautions and examine these statements is reduced. Such statements may therefore be an efficient way to convey important information.

Consumer trust is the perhaps the most valuable asset of any business or brand. But when consumers learn that such statements serve as cheap signals to lower the cost of manipulating them, the environment significantly changes.

Suspected misconduct may have an effect on consumers' confidence towards an entire industry. In light of the egg allegations, consumers have every right to question whether they are protected against being misled.

Therefore, undercutting consumer trust may have a spillover effect, which can harm all producers. They will have to invest more to convince consumers their statements are genuine.

Moreover, the harm can go well beyond negative economic consequences. Trust also has societal value, as it promotes quality of life. Societies characterised by trust allow individuals to remove excessive guards in various walks of life. People who trust others are optimistic, happier, tolerant, and view interacting with strangers more as an opportunity than a threat.

Search for identity markers

From another perspective, consumers' decision to pay a premium for free-range eggs can reflect ideological or ethical values. In other words, "free-range" statements can represent more than merely dry, economic facts. As Western societies grow richer and more sophisticated, people's search for identity markers increases.

The contemporary idea of market value as being only about price and quality is incomplete. It may well be the case that consumers' subjective wellbeing comes from living a values-aligned life. The preference to consume free-range eggs can be part of this. And undermining people's ability to live such lives should not be easily dismissed.

Integrity and honesty are core ethical principles of New Zealand businesses. Compliance with these principles is important for any veteran or newcomer in the food industry. While government agencies, such as the Commerce Commission, may endeavour to detect and prosecute misconducts, there are always gaps between committing and detecting.

Enforcement efforts should therefore be supplemented with effective pressure and greater vigilance from industry peers. The egg-farming industry should probably consider introducing more co-ordinated measures to ensure the authenticity of free-range and other similar labels. It is ultimately in its best interests.

New Zealand enjoys a high level of trust. But trust is hard to build, easy to ruin and challenging to restore. Consumers should be able to rely on sellers' representations. They should also be able to trust that commensurate punishments are imposed on those who break the rules and undermine or exploit the system.

Policymakers, consumer organisation, courts and honest traders can work together to maintain trust and allow markets and people to flourish. We all deserve it.

  • Dr Samuel Becher is an associate professor of business law, and Dr Hongzhi Gao a senior lecturer in international business, at Victoria Business School. This article was originally published on Stuff.co.nz.