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Price elasticities of demand for organic food: an econometric analysis of price- versus non-price determinants of consumer behaviour
Project
Project code: 2808OE148
Contract period: 17.05.2010
- 31.12.2012
Budget: 71,692 Euro
Purpose of research: Applied research
With a market share of 3.7 % the organic food market is still a small market segment in Germany – but it has considerable demand and growth potential. How large is the willingness to pay of German organic food buyers? How do they react to changes in prices and income? Are there any differences in consumers’ reaction between different product groups? And does price responsiveness and purchasing behaviour differ between different groups of organic food buyers? These are the questions which will be addressed in this final report of this project.
Results of the project provide insights into the demand of German consumers for organic and conventional milk, eggs, vegetables and meat. The analyses are based on two panel datasets provided by the GfK consumer research association that comprises purchase information as well as sociodemographic characteristics of the households. The underlying panel is a unique dataset covering grocery purchases of more than 20 000 households over a sample period of five years (2004 to 2008).
A two-step estimation procedure is applied. First, a probit regression examines which household characteristics affect the probability to buy the organic product in question. Second, Almost Ideal Demand Systems (AIDS) provide detailed demand elasticity estimates. Thereby, the study accounts for various methodological issues that typically arise in demand system estimations. Relevant methodological peculiarities include the sociodemographic heterogeneity of households, the qualitative heterogeneity of products, dynamic aspects of demand, censoring and potential price and expenditure endogeneity.
Results confirm that primarily prices and income, but also habit formation are the driving factors of the demand for organic food products. In previous studies that were mainly conducted in the USA the demand for organic food was found to be highly elastic. Results of this project underline the need for a more differentiated view on organic consumers’ behaviour: Demand for products with a small market share and a niche existence seems to be elastic. In this respect, results of prior studies are confirmed. However, demand for organic products that are well-established in the German food market, turns out to be inelastic. In this regard, the demand for organic milk, organic eggs and organic fresh produce are as inelastic or even more inelastic than the demand for their conventional counterparts. Hence, there is evidence that differences in market structure and consumer preferences between the German and the US market, particularly the degree of product differentiation, induce a differential responsiveness to the consumer price.
Furthermore, price responsiveness differs between consumer groups. The example of milk shows that current non-buyers are considerably more price sensitive than households that already purchase organic products. Therefore, results clearly reveal that although there is little potential to increase organic sales of present consumers by means of price reductions there is a sizeable potential to expand the organic market by attracting new consumers and by strengthening the demand of occasional buyers. This shows that it is crucial to differentiate between consumer groups when taking marketing decisions or predicting future market development based on elasticity estimates.
Estimations for several distinct time periods reveal that the price responsiveness of organic consumers have declined over time. In contrast, expenditure elasticities have grown. Obviously, organic food consumer behaviour is in a process of change. A declining price sensitivity is indeed an important sign of a maturing market.
Section overview
Subjects
- Market Analysis/Marketing Strategy
- Organic Farming
Framework programme
Federal Organic Farming Scheme and other forms of sustainable agriculture (BÖLN)
