Assessing the demand for phytosterol-enriched products

Phytosterol is a healthful ingredient that helps reduce blood cholesterol levels. It has been over ten years since the first phytosterol-enriched product, Benecol margarine, was launched in Finland in 1995; however, understanding of this product is still limited. In addition, it has been shown in the literature that health-related concerns have an influence on consumers? decisions to consume harmful or beneficial ingredients. This study estimates the demand for three phytosterol-enriched products in the categories of margarine, orange juice and yogurt. The objectives of this study are (1) to estimate price and expenditure elasticities for phytosterol-enriched brands and comparative non-phytosterol brands, (2) to identify cannibalization effects with a proposed methodology, and, (3) to estimate the welfare effects associated with the introduction of a product. Subsuming LA/AIDS, Rotterdam, CBS and NBR demand systems, the Barten synthetic demand system is applied to margarine weekly scanner data. Phytosterol-enriched margarine brands (Benecol and Take Control) commanded significantly higher prices relative to other margarine brands. Strong substitutability among the phytosterol brands was evident as suggested by the statistically significant and relatively large compensated cross-price elasticities. Cannibalization is defined as the competition between products offered by the same firm. Cannibalization studies are important to multi-product firms because they provide insights into the benefits of offering product variety. In addition, the identification and assessment of cannibalization are integral factors for strategic decisions of new product introductions. However, there are no standard measures to identify its effects. We use the Barten synthetic demand system along with two conventional measures to illustrate that the use of cross-price elasticities derived from a flexible demand system is a viable alternative to identify cannibalization effects. The third objective analyzes the consumer welfare effects associated with a new functional food product introduction. Using the Barten synthetic model and pre- and post-introduction scanner data, we estimate direct price and variety effects associated with the introduction of a new functional food product (i.e., phytosterol-enriched product). With post-introduction data and an assumed demand structure, we also estimate indirect price effects. Our results suggest notable welfare effects consisting of a relatively small price effect and a large variety effect.