Good for Consumer, Bad for Small Businesses

The Nutrition Labeling and Education Act of 1990 was enacted by Congress in an attempt to protect consumers by letting them know exactly what it was they were consuming. But a recent study at the Fuqua School of Business shows that the law, which mandated standardized nutrition labels, may have had unintended consequences: namely, the reduction of consumer choice as smaller firms poorly equipped to deal with the costly conversion were forced out of the market.

In a study funded by research grants from the National Science Foundation and the Marketing Science Institute that appears in the spring issue of the journal Marketing Science, Christine Moorman, T. Austin Finch Sr. Professor of marketing; Carl F. Mela, an associate professor at the Fuqua School; and Ph.D. candidate Rex Du analyzed grocery-store food sales from before and after the NLEA took effect in 1994, using 1993 and 1995 supermarket data on 29,374 food firms. They studied nonfood sales over the same time span as a control.

They found that the standardized food-label disclosures resulted in a higher percentage of small companies exiting various food categories, as well as food-industry leaders enjoying a greater product distribution advantage over their smaller rivals. "The outcomes we observed would not necessarily be expected when standardized information, like a label, is infused into the marketplace," Moorman says. "We expected that label information would allow firms to compete more honestly for consumers' purchases, but instead we find an unintended loss of small firms in food categories."

The authors determined that industry leaders benefited disproportionately from the legislation--which cost the food industry an estimated $1.4 billion to $2.3 billion--perhaps because their greater financial resources, brand awareness, customer knowledge, and distribution power enabled them to influence regulatory changes and anticipate and respond more quickly and effectively to the new information-disclosure requirements.

In promoting competition, the authors say, regulators must carefully examine all the ways potential policies might affect firms of different sizes and, as a result, the market itself and consumers. Surprisingly, the study uncovered little if any evidence of price hikes by the bigger food manufacturers after the NLEA went into effect, a development Moorman credits to intense competition among food-industry giants. But she notes that the study still shows how large firms, which are often included in the drafting of legislation, can affect competitors by exerting influence over the types of regulations adopted.

"Our findings support the view that firms can make strategic use of regulation," she says. "This suggests that firms should think about the costs and benefits of regulation relative to competitors, not in absolute terms."