A Calibrated Auction-Conjoint Valuation Method

Valuing Pork and Eggs Produced under Differing Animal Welfare Conditions

Jayson LuskProfessor and Willard Sparks Endowed Chair

Oklahoma State Universityjayson.lusk@okstate.edu

joint work with Bailey Norwood

Introduction

• What is your attitude toward WTP values derived from surveys and experiments?

• Tension– skepticism of validity of hypothetical surveys and generalizability

of experiments

– need data to answer questions that market data cannot address

• Can some of this tension be relieved?

Introduction

• “Irrational” and unsystematic behaviors– behavioral anomalies

preference reversals WTP/WTA gap non-linear probability weighting time inconsistent preferences violations of procedural invariance

– a problem for experimentalists and theoreticians alike

• How do we deal with the “anomalies” we see in many valuation experiments? – attempt to model the behavior

– use mechanisms that promote rational and systematic behavior

Objectives

1) Introduce a mechanism which forces and promotes a kind of rationality or internal consistency on people’s behavior

2) Utilize the mechanism to determine people’s preferences for eggs and pork produced in differing conditions of animal well-being

The CAC Method in a Nutshell

Step 1Rate the

desirability of many attribute

levels

Step 2Rate the relative importance of

attributes

auction bids

Step 3Calibrate utility

function to generate desirable bids

Step 4Submit bids

Advantages of the Method

• Consistent and systematic responses – imposes an algebraic relationship between valuations and utility

– consequences of ratings and bids are transparent

– iterative process promotes learning and provides feedback, which promotes the formation of rational preferences (Plott, 1996)

• Measurement of preference heterogeneity

• Allows for the evaluation of a large number of complex attributes and attribute-levels– permits the estimation of values for a large number of products

– why is this important in the animal welfare debate? unintended consequences of single-attribute policies

Farm Animal Welfare

• “Industrialization” of animal agriculture

Farm Animal Welfare

Source: USDA/NASS, LMIC

• “Industrialization” of animal agriculture

LITTERS PER BREEDING ANIMALAnnualized, Quarterly

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

1983 1986 1989 1992 1995 1998 2001 2004 2007

Litters

Farm Animal Welfare

Source: USDA/NASS, LMIC

• “Industrialization” of animal agriculture

PIGS PER LITTERQuarterly

7.2

7.7

8.2

8.7

9.2

9.7

1983 1986 1989 1992 1995 1998 2001 2004 2007

Head

Farm Animal Welfare

Source: LMIC

• “Industrialization” of animal agriculture

PORK PRODUCTION PER BREEDING HOG1982-2007 (Est.), Annual

1500

2000

2500

3000

3500

4000

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Pounds

Farm Animal Welfare

• “Industrialization” of animal agriculture

$100

$200

$300

$400

$500

$600

$700

1973

1974

1975

1976

1978

1979

1980

1981

1983

1984

1985

1986

1988

1989

1990

1991

1993

1994

1995

1996

1998

1999

2000

2001

2003

2004

2005

2006

Year

Rea

l M

ean

Pri

ce (

$/cw

t) b

ase

year

= 2

007

Pork (average annual change = -0.67%; change from 1973-2007 = -44%)

Beef (average annual change = -0.86%; change from 1973-2007 = -36%)

Chicken (average annual change = -1.66%; change from 1973-2007 = -61%)

Farm Animal Welfare

• Rise in the power of animal activist groups– decreased cost of publicity

– increasing consumer income

– decreased connection with production agriculture

• Impact on food marketing– high-end retailers sell “animal compassionate” meat/eggs

– McDonald’s & Burger King require stricter standards

– marketing campaigns aimed at “compassionate carnivore”

• Impact on food policy– In U.S., several states have banned gestation crates & cages via

public referendum and legislative initiative (most recently in California on Dec 4, 2008)

– In E.U., battery cages in layer production banned by 2012

– In E.U., crates in pork production are banned in UK and Sweden

Meet your meat: http://www.youtube.com/watch?v=VIjanhKqVC4

Farm Animal Welfare

• Animal well-being is a complex and multi-dimensional issue– previous studies have elicited consumer preferences for a limited

number of production practices, such as the use of cages, gestation crates, or mobile abattoirs

– consider bans on cages/crates; simply banning on cages/crates/ will not necessarily increase animal welfare

– there is a need for an approach that considers numerous and complex set of attributes, and is capable of eliciting preferences for these numerous attributes without producing subject fatigue or irrational responses

Methods

• Participants– marketing research companies were hired to recruit 100

people from the general population of Chicago, Dallas, and Wilmington, NC

– in each location, four sessions were held with 25 people assigned to each session

– half the people were assigned to a pork treatment and half were assigned to an egg treatment

– each session lasted about 90 minutes

• Information – detailed information was given describing ~ 10 attributes

that differentiate different egg/pork production systems

Attribute-Level Rating

Attributed and Levels (Eggs)

Attribute Levels

Eggs1. Price (dozen eggs) $0.50, $1.50, $2.50, $3.50, $4.502. Barn Space Per Hen (sq inches) 48, 69, 100, 171, 252, ≥353

3. Barn Floor Space Per Hen (sq inches) ≤97, 111, 129, 155, ≥1944. Beak Trimming beaks are not trimmed, beaks are trimmed <

10 days old, beaks are trimmed when older than 10 days

5. Room for scratching, foraging, and dust bathing (sq feet per hen)

0, 1, 2

6. Nest Availability no nests, group nests - no bedding, group nests - with bedding, individual nests - no bedding, individual nests - with bedding

7. Free Range no free range, free range without predator protection or shelter, free range with predator protection, free range with shelter, free range with predator protection and shelter

8. Group Size > 3,000 hens, > 3,000 hens with perches, 2,000 hens, 2,000 hens with perches, < 7 hens, < 7 hens with perches

9. Type of Feed non-organic, non-organic with flaxseed to add omega 3 fatty acids, organic

Attributed and Levels (Hogs)

Attribute LevelsPork1. Price (2 lb package) $2, $4, $6, $8, $10 2. Space Per Gestating Sow (square feet) 14, 30, 60, 90, 120, ≥1503. Space Per Nursing Sow (square feet) 14, 30, 60, 90, 120, ≥1504. Space Per Growing Pig (square feet) 8, 16, 24, 32, 40, ≥485. Nesting Provisions no straw/no privacy, with straw/no privacy, no

straw/with privacy, with straw/with privacy6. Survival Rate of Farrows 50%, 70%, 80%, 90%, 99%7. Minor Surgeries none, performed when < 7 days old,

performed when older than 7 days8. Free Range no free range, free range without shelter or

pasture, free range with no shelter and with pasture, free range with shelter and no pasture, free range with shelter and pasture

9. Group Size (number of sows) 1, 5, 10, 20, 3010. Provision of Dry Straw (inches) 0, 3, 6, 1211. Type of Feed non-organic, non-organic without hormones

or antibiotics, organic

Relative Attribute Importance

Methods

• Information – detailed information was given describing 5 egg/pork

production systems as they relate to underlying attributes

Attribute Production System

Eggs Cage Barn AviaryAviary with Free Range

Organic

2. Barn Space Per Hen (sq inches)

69 155 186 186 186

3. Barn Floor Space Per Hen (sq inches)

69 155 97 97 97

4. Beak Trimming trimmed <10 days

trimmed <10 days

trimmed <10 days

trimmed <10 days

trimmed <10 days

5. Room for scratching, foraging, and dust bathing (sq feet per hen)

0 1.35 1.35 1.35 1.35

6. Nest Availability no nests individual nests with bedding

individual nests with bedding

individual nests with bedding

individual nests with bedding

7. Free Range no free range no free range no free range free range with shelter and predator protection

free range with shelter and predator protection

8. Group Size < 7 > 3,000 > 3,000 with perches

> 3,000 with perches

> 3,000 with perches

9. Type of Feed non-organic non-organic non-organic non-organic organic

Egg Production Systems

Cage Barn

Aviary Aviary w/ FR

Hog Production Systems

Crate Group Pen

Open Barn Pasture

Predicting Bids

• The previous answers were used to calculate utility of each of the j = 1, 2, . . .5 systems

• WTP premium for the jth system relative to cage/crate was calculated

• Someone entered bid for cage/crate, then the predicted WTPs were output as the initial bid for the other 4 systems

attributesN

k

levelsN

liklikklij

k

Utility1 1

)Rating Level Attribute*Importance Attribute(*)01/AbsentPresent(

pricei

cagecrateiijcagecrateiij

UtilityUtilityWTPWTP

,

/,/, Importance Attribute

Auction Training

• Used BDM-type mechanism – BDM

if bid > “secret price,” win an pay “secret price” If bid < “secret price,” pay nothing & get nothing we spend a lot of time explaining why it is in people’s best

interest to bid an amount equal to true value we ask people lots of questions to make sure they understand

the auction

– training session where people bid to buy a Snickers bar– training session where people bid to buy 5 different bars– one of five products was randomly selected and one person

was randomly selected

Relative Attribute Importance and Bids

Total WTP for Eggs (1 dozen)

0

10

20

30

40

50

60

Percent

Cage

- 2 - 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

0

10

20

30

40

50

60

Percent

FR

eggwt p

WTP Premium for Eggs

0

5

10

15

20

25

30

35

40

Percent

Barn

-

Cage

- 4 - 2. 5 - 1 0. 5 2 3. 5 5 6. 5 8 9. 5 11 12. 5 14

0

5

10

15

20

25

30

35

40

Percent

FR

-

Cage

eggwt p

Total WTP for Pork (2 lbs)

0

5

10

15

20

25

30

35

40

45

Percent

Crate

- 5 - 4 - 3 - 2 - 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

0

5

10

15

20

25

30

35

40

45

Percent

FR

hogwt p

WTP Premium for Pork

0

10

20

30

40

50

60

70

80

Percent

Barn

-

Crate

- 6 - 4. 5 - 3 - 1. 5 0 1. 5 3 4. 5 6 7. 5 9 10. 5 12 13. 5

0

10

20

30

40

50

60

70

80

Percent

FR

-

Crate

hogwt p

Are Bids Rational?

“Recent examples of animal welfare issues that have unnerved farmers include ….the banning the use of gestation crates…and have upset farmers because they say the actions are based on emotion rather than science.”

But what does science say?

Are Bids “Rational”?

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

0 1 2 3 4 5 6 7 8

Med

ian

Bid

for

Pro

du

ctio

n S

yste

m

Animal Welfare Score from Bracke et al. (2002) and DeMol et al. (2006) Models

Eggs

Pork

Are Bids “Rational”?

Change

MeanWTP

(n=109)

MedianWTP

(n=109)Space60 vs. 14 ft2 per gestating sow $0.35 $0.2460 vs. 14 ft 2 per nursing sow $0.26 $0.17Group Size5 sows vs. 1 sow $0.06 $0.0010 sows vs. 1 sow -$0.19 -$0.1130 sows vs. 1 sow -$0.45 -$0.29Surgeriesperformed < 7 days vs. none $0.14 $0.01performed > 7 days vs. none -$0.15 -$0.06Survival Rate of Farrows90% vs. 80% $0.18 $0.1380% vs. 70% $0.15 $0.11Otherorganic vs. non-organic feed $0.41 $0.13free range with shelter but no pasture vs. no free range $0.43 $0.13free range with pasture and shelter vs. no free range $0.82 $0.42

Results

• These results only provide a partial picture of the many values that can be generated– see egg model spreadsheet– see hog model spreadsheet– we can “decompose” the value of a production system into

it’ representative attributes– note: the value we compute for a ban on gestation and

farrowing crate ban is much less than in previous studies

Conclusions

• A useful new method?

• Implications for animal welfare debate– Pork cost and WTP ($/lb) relative to crate system

– Egg cost and WTP ($/dozen) relative to cage system

  Group Pen Open Barn Pasture

Cost $0.04 $0.14 $0.08

WTP $0.06 $0.92 $1.01

Source: Sumner et al.

Source: Norwood’s calculations

  Barn/Aviary Free RangeCost $0.31 $0.37WTP $0.55 $0.95

Ongoing Research

• Animal welfare is an externality that need not have anything to do with meat/eggs– what are people WTP for animals to live in one system vs.

another assuming you’ll never consume any products from the animal?

• Measuring animal WTP for changes in living conditions

• Modeling Altruism and WTP for animal welfare– contradiction between efficiency and Kaldor-Hicks

criterions