The data used in this chapter are obtained from the stated preference survey described in Chapter 3. Due to the overlap between the data set used in this chapter and in Chapter 5, only the unique part of the data which is related to the reference-dependent effects is mentioned here. To measure the reference points for price and Omega-3, each respondent was asked how much he or she expected to pay for a 2-litre carton of milk enriched with Omega-3, and whether the milk
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product he or she typically purchases is Omega-3 enriched milk. Respondents‘ answers to those questions are treated as their perceived reference levels for the price and Omega-3 attributes. In the choice experiment, each product contains different levels of price and presence/absence of Omega-3. Respondents‘ choices in each choice set were observed, and the choices that they made were taken as the actual levels for the price and Omega-3 attributes. Since each respondent completed 8 choice sets, each respondent has 8 observations. The difference between the reference point and the actual observed choice is used to generate the reference-dependent effects for the price and Omega-3 attributes for each respondent. Table 6.1 summarizes the variable descriptions for the reference-dependent model.
Table 6.1: Variable Descriptions for the Reference-Dependent Model
Attributes Abbreviation Description
Price Price The price adopted in the choice experiment for a two-litre
carton of milk, ranging from $1.99 to $4.49.
Function Claim FC = 1 if the milk product has a function claim (‗Good for your
heart‘), otherwise 0.
Risk Reduction Claim RRC =1 if the milk product has a risk reduction claim (‗Reduces
the risks of heart disease and cancer‘), otherwise 0.
Disease Prevention Claim
DPC =1 if the milk product has a disease prevention claim (‗Helps
to prevent coronary heart disease and cancer‘), otherwise 0.
Heart Symbol Heart = 1 if the milk product has a red heart symbol, otherwise 0.
Government Verification
GOV = 1 if the health claim on the milk product is verified by government (Health Canada), otherwise 0.
Third Party Verification
TP = 1 if the health claim on the milk product is verified by a third party (Heart and Stroke Foundation), otherwise 0.
Omega-3 Omega3 = 1 if the milk product contains Omega-3, otherwise 0.
No Purchase NoPurchase =1 if an alternative represents ‗not to purchase any milk
product‘ in the choice set, otherwise 0. Reference-Dependent Variables
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PG - = 1 if the alternative price involves a gain which means it is below the respondent‘s reference price, otherwise 0.
PL - = 1 if the alternative price involves a loss which means it is above the respondent‘s reference price, otherwise 0.
Omega3G - = 1 if the alternative involves a gain in Omega-3 attribute,
otherwise 0.
Omega3L - = 1 if the alternative involves a loss in Omega-3 attribute,
otherwise 0.
Exogenous Covariate Variables and Key Factors
Heart Disease HeartDisease =1 if a respondent self-reported that he or she has heart disease, otherwise 0 (as defined in Table 5.1).
Income Income A demographic variable representing respondent‘s income,
as defined in Table 5.1.
Age Age A demographic variable representing respondent‘s age Attitudes towards
functional food
Attitude Factor 1 from the factor analysis in table 4.2
Trust in health claims and nutrition labels
Trust Factor 2 from the factor analysis in table 4.2
Health knowledge Knowledge Factor 3 from the factor analysis in table 4.2
With the specified attributes and levels of milk products in the choice experiment, consumer i will choose his/her preferred alternative j in each choice set if and only if the utility associated with alternative j is greater than other alternatives. According to Random Utility Theory, the indirect utility of consumer i choosing alternative j can be expressed as the following function:
Uij = ß1NoPurchase +ej (6.6)
Uij = (1-NoPurchase)*(ß2FunctionClaimj + ß3RiskReductionClaimj +
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+ß8Omega-3j + ß9Pricej + ß10PriceGainj + ß11PriceLossj + ß12Omega3Gainj +
ß13Omega3Lossj) + ej (j ≠ no purchase) (6.7)
Most variables in equation (6.7) are described in Chapter 4 and will just be briefly repeated here. NoPurchase is a dummy variable that equals 1 if an alternative represents ‗not purchase any of the milk products‘ in the choice set and equals 0, otherwise. Omega-3 is an alternative specific constant variable equal to 1 if the milk product includes Omega-3 ingredient and equal to 0, otherwise. The health claims attribute is separated as four dummy variables: Function Claim, Risk Reduction Claim, Disease Prevention Claim and No Claims. The verification organization attribute is represented by three dummy variables, Government, Third Party and None. Heart is a dummy variable equal to 1 if the milk product has a red heart symbol, otherwise 0. Price is the retail price of the milk product in alternative j. ßs are the estimated parameters and ej is the error
term.
As defined in section 6.3.1, Omega3Gj and Omega3Lj are two dummy variables which
represent whether the choice involves a gain or a loss with respect to the presence of the Omega- 3 attribute in a choice option. In equation (6.7), Omega3Gainj is an interaction variable between
Omega3Gj and Omega-3j, because the gain effect for Omega-3 can only occur when the actual
option contains the Omega-3 ingredient. Similarly, Omega3Lossj captures the interaction
between the Omega3Lj and the third alternative specific constant which represents the absence of
the Omega-3 attribute, because the loss effect for Omega-3 can only arise when the actual option does not contain Omega-3. For the price attribute, PGj and PLj are the gain and loss effects for
the price of Omega-3 milk which are also described in section 6.3.1. PriceGainj and PriceLossj
are two interaction variables that interact variables PGj and PLj with the actual price to capture
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of the reference-dependent model, the value function should be steeper in the loss domain than the gain domain since losses are expected to have a larger impact on consumers‘ preferences than gains. To be consistent with the prediction, the magnitude of the coefficient for PriceLossj is
expected to be greater than the coefficient for PriceGainj. Similarly, the magnitude of the
coefficient for Omega3Lossj is expected to be greater than the coefficient for Omega3Gainj.
According to the prediction, the coefficients for Omega3Gainj and PriceGainj should be positive
while the coefficients for Omega3Lossj and PriceLossj should be negative.
Equation (6.8) specifies a random utility function including interaction effects between the reference-dependent variables and some exogenous demographic and attitudinal variables. These interaction effects help to test consumers‘ heterogeneous responses to the reference- dependent variables. The indirect utility function with interaction effects of consumer i choosing alternative j can be expressed as the following function:
Uij = (1-NoPurchase)*(ß2FunctionClaimj + ß3RiskReductionClaimj +
ß4DiseasePreventionClaimj + ß5HeartSymbolj + ß6Govj + ß7ThirdPartyj
+ß8Omega-3j + ß9Pricej + ß10PriceGainj + ß11PriceLossj + ß12Omega3Gainj +
ß13Omega3Lossj +γnZn*Xj) + ej (6.8)
In this equation, the main effect variables and the reference-dependent variables for the price and Omega-3 attributes are the same as in equation (6.7). Where Zn represents the selected
exogenous covariate variables (e.g. income, education, heart disease and three key factors from the Factor Analysis); Xj represents the reference-dependent variables for Price and Omega-3 that
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example, Zn*Xj can be specified as interaction variables, such as Incomei*PriceLossj,
HeartDiseasei*Omega3Gainj, Attitudei*Omega3Gainj, etc.
The five covariates (Income, HeartDisease and three key factors) were considered to have the potential to explain the source of the reference-dependent effects examined in this study. The following prior beliefs are informing the choice of variables: higher income consumers are expected to be less price sensitive than those consumers with lower incomes. Respondents who suffer from heart disease are expected to be more concerned with obtaining an Omega-3 gain than those who do not have heart disease. Consumers who have positive attitudes towards functional foods, with more health knowledge or who tend to trust health claims or nutrition labels, are assumed to be more sensitive to obtaining gains or ‗suffer‘ more from losses with respect to the presence of Omega-3 than those who do not have positive attitudes towards functional foods, have less health knowledge or tend to be trusting of health claims or nutrition labels.
This section has specified two models of the random utility function with reference- dependent effects. The next section presents the estimation results for those models. The Conditional Logit model is used to obtain estimation results.