In March 2007, after the Chinese recalled tainted wet dog food, what happened? In the graph above, depicting weekly quantity and price for wet dog food sold in the US, we see that price (red) initially peaked, and then fell. Meanwhile, quantity (blue) initially fell, and then recovered to its pre-recall level. But price never returned to its pre-recall level.
A free copy of my textbook to the best explanation of these price and quantity changes in the comments below.
Why do you have an incentive for someone who already has the answer? Shouldn't it be the worst answer that receives the book?
ReplyDeleteOK, I am busted. My incentive compensation rewards those who need it the least. The rich get richer and the poor get poorer. Life is not fair. And then you die.
ReplyDeleteNow quit stalling and answer the question.
It could be that retailers have a stock of the dog food or a contract to sell a set amount. This is the stock of food that they must get rid of. Then, it is just a matter of finding a price low enough to dump it all.
ReplyDeleteI haven't been following the story that closely, but maybe the food doesn't sicken every animal. If there is a probability of getting sick, multiplied by the cost of becoming sick, this could be equal to the difference between the two prices.
Lastly, maybe some consumers are uninformed and don't know about the bad dog food. This story could be tied into my first suggestion, where lower prices were used to move down the demand curve of the uninformed. This seems unlikly, though, since a recent Pew poll suggests that 88% of the sample could identify China as the source of recent recalls.
The increase in price is due to the supply of dog food decreasing while the demand for dog food remaining constant (you've got to feed Fido something!) Retailers were probably scrambling to put anything they could on the shelves.
ReplyDeleteWhy the price is lower after the shock? I would guess that people either found an acceptable substitute (cats: the other white meat), or that consumers started hoarding dog food haven't run out yet (there's only ~20 days worth of data after the shock, and I usually try to buy a month at a time to minimize trips to the store).
After the scare the supply dropped, shift to the left, raising price. Then demand dropped, shift to the left, after the realization and price then drops. Later the supply returns to normal, right shift, lowering the price even more. Not until trust is returned will demand shift back right and level out price.
ReplyDeleteTry harder--no winners yet.
ReplyDeleteRemember you have to explain not only the initial price increase and quantity decrease, but also the subsequent rise of quantity back up to where it was, but price has not returned to where it was.
The recall of pet food leads to an initial decline in the supply of dog food as retailers rush to remove tainted food from their store shelves. The negative supply-shock leads to higher prices and lower quantity. The non-tainted food left on the shelves could probably command a higher price due to their perceived safeness. In addition, the brands left on shelves probably consisted of gourmet or local brands which were already higher priced.
ReplyDeleteOver time, non-tainted food re-enters the supply chain and fills up the once barren shelves. The rightward shift in the supply curve leads to lower prices and higher quantity. Many pet food makers also lowered their prices and offered coupons and other incentives to consumers to rebuild trust in their product. Premium brands who saw their sales rise during the recall might also have chosen to also lower their prices slightly to keep their new customers from switching back to national brands.
Dog food is, for lack of better words, the last item in the "value extraction" chain for meat (ie. you either put it in a dog food can and try to sell it, or pay someone to dispose of it somewhere, like SatCo).
ReplyDeleteI would guess that the amount of meat consumed by humans didn't vary during the recall, therefore the supply of dog food "inputs" stayed constant during the ordeal. Once the recall was over, supply rebounded to its natural level.
During the recall, pet owners fed their dogs substitutes (table scraps, dry doog food, etc.) which shifted the demand curve to the left. Supply rebounded but demand didn't, which means lower quantity and lower prices.
The initial price increase and quantity decrease were caused by the shock of no longer having the tainted dog food supply available.
ReplyDeleteThe subsequent rise of quantity was the market's reaction to handle the demand. The price has not returned to where it was because the new supplies have crappy quality.
Price increased initially as wet dog food supply dropped, yet some consumers continued to demand it over the short term. However, in the longer term (short and long being relative terms), consumers began to accept alternatives to the wet dog food which forced prices to drop to bring consumers back to the wet dog food product. Over time, prices dropped and quantities rose to the point of equilibrium, however that doesn't mean the wet dog food consumer base has returned. In reality, the market is now selling to a lower value consumer (ie one who will only purchase at a lower price) than it did before since many of the higher value consumers have switched to "safer" alternatives. The "return to pre-recall quantities" hides the shift in consumer type. The result should be a more elastic demand for the wet dog food than existed before.
ReplyDeleteWe have a winner:
ReplyDeleteDavid has the best explanation.
1. an initial decrease in supply caused price to increase and quantity to fall.
2. Demand then fell, as consumers became aware of the tainted food. (It is interesting to me that 1 supply reacted more quickly than 2 demand to the change.)
3. Supply increase which should have taken us to a lower price and lower quantity equilibrium. But since quantity came back, we can infer that supply has increased beyond where it was before the crisis began as manufacturers are willing to supply at lower prices to lure customers back.