Abstract
This paper presents a novel perspective on industrial practices in modern competitive capitalist economies, questioning, in particular, the link between prices, competition, and the quality of goods and services. It tries to characterize a business practice that consists in reducing prices and maintaining (or increasing) profit margins by reducing the quality of goods and services while still presenting them as the same as before. The paper is primarily concerned with the practice of producing inferior quality goods by reducing the quantity of inputs used in the production process, or mixing inputs with cheaper constituents. The proposed term for this practice, “industrial seigniorage,” is based on the historical privilege of feudal lords (from Old French seigneur), who—possessing the right to mint gold coins—made a profit by adding cheaper base metals to the bullion. The present, essentially exploratory investigation attempts to delineate the widespread existence of such practices in various industrial sectors. It strives to explain the fundamental elements of consumer behavior that enable this practice to exist and discusses the effects of industrial seigniorage on several social issues. The attempt of the paper is finally to show that contrary to the ideology of capitalism, competition does not necessary lead to benefits for consumers or to an increase in product quality.
Introduction
The 2013 meat adulteration scandal (food scandal in Europe, where foods advertised as containing beef were found to contain undeclared horse meat and other undeclared meats, such as pork) brought to light several cases of fraudulent meat substitution in the food industry, for example in the UK and in South Africa. Beef-based food products containing undeclared horsemeat were first found in the UK, followed by the discovery of several other cases of meat substitution around the world. Tests conducted by D’Amato et al. (2013) discovered that a popular South African cured meat snack contained pork, horse, kangaroo, and even giraffe meat labeled as antelope in 90 percent of the samples. These fraudulent practices raise questions concerning the possible existence of other nonfraudulent cases of input substitution. For example, DeShazo et al. (2013) microscopically analyzed chicken nuggets from two American food chains, revealing that chicken meat was not the main ingredient and that the remaining meat content consisted primarily of fat (along with bone spicules, epithelium, connective tissue, skin, and viscera). All of these input substitutions affect the quality of goods (and services) bought by consumers, suggesting a possible connection to the competitiveness of firms in mass-production/mass-consumption economies. In economics, competition between firms is usually seen as beneficial to society as a whole because it allows people to benefit from cheaper products that should also be of better quality. This statement, which is also a principle of some heterodox theories, is generally accepted as a common and evident fact. Consequently, economic policies often conclude that increased competition and liberalization of the economy will improve quality of life because firms must cut prices and make significant efforts to improve the quality of their products to retain their customers. This paper suggests an opposing view, arguing that, although competition between firms in mass production societies can lead to cheaper products, these products may be of worse quality. The investigation demonstrates how competition can result in the exploitation of consumers. Specifically, the present analysis concerns the practice of adding adulterants or other additives to goods by mixing inputs with cheaper substitutes that do not offer the same functionalities, or by simply reducing the quantity of inputs, while still presenting the good as the same as before. Based on the historical practice of feudal lords who derived a profit from adding base metals to the minting of gold coins, the term proposed for this practice is “industrial seigniorage.” “Industrial debasement” could also be used, as debasement refers to the practice of lowering the value of a currency, such as gold and silver coins, for financial gain (to a sovereign) at the expense of citizens, whereas seigniorage is, historically (in times when coinage was the prerogative of sovereigns and feudal lords), the profit derived from the addition of base metals to gold and silver, resulting in debased coinage. As the article will show, both terms apply.
The substitution, dilution, and adulteration of goods allow firms to improve their relative position in a competitive market by enabling them to offer cheaper, (marginally) inferior goods while maintaining their profit margins. Section 1 of the present paper examines the widespread existence of such practices throughout the food industry. Because of the exploratory character of this work, the study relied on French and Belgian examples, reserving other areas of investigation for future research. Section 2 explains the fundamental elements of consumer behavior that allow this practice to exist. Particular attention is given to the inability of consumers to evaluate the quality of goods and services, to their incapacity to distinguish a superficially modified good from its original version, and to the role of financial constraints continually shaping consumer choices. Finally, the discussion examines the connection between industrial seigniorage and several major social issues, such as public health and GMOs. The overarching message this paper leads to is that competition does not necessarily benefit consumers, and does not necessarily lead to an increase in product quality.
1. The Concept of “Industrial Seigniorage”
1.1. Origins of the concept
This paper introduces the term “industrial seigniorage” to mean the practice of altering the quality of goods by reducing the quantity of inputs or by adding cheaper inputs to the original composition while still presenting these goods as the same as before. This practice has its origins in the Middle Ages when feudal lords (who had the right to mint coins) derived a profit from adding base metals to gold (making it possible to produce more coins) while still presenting coins as having the same value as before. In the context of modern economies, industrial seigniorage refers to a firm that produces a good of inferior quality by reducing the quantity of input incorporated into the production process or mixing inputs with cheaper substitutes, yet presents the good as if unaltered from its original composition.
From a technical point of view, the principle of industrial seigniorage can be linked to the concept of adulterated goods, as analyzed by Donna Wood (1985). Adulteration is the undeclared substitution of original inputs with unlawful, sometimes dangerous, ingredients to reduce unit costs while maintaining the original presentation of the product. The practices of “misbranding” and “adulteration” were first defined in the Pure Food and Drug Act of 1906 in the United States. Adulteration, which is defined as the addition of illegal or other substances not allowed in the composition of goods, most often refers to the use of toxic adulterants. However, as Wood recalls, original inputs may simply be substituted with cheaper nontoxic additives (e.g. water), which seemed to be a much more widespread practice than “toxic fraud” (ibid.). Non-toxic product debasement, although not strictly considered adulteration, nevertheless affects the value consumers receive in buying a product because the product’s inherent value (quality) no longer corresponds to the monetary value (price) (ibid.). Wood reports a quote from the 1906 Pure Food Investigating Committee:
Cheap yellow sugar flavored with vegetable extracts passed as Vermont maple sugar; colored oleomargarine was sold as butter; fruit jams were often made from peel, cores and glucose; pepper and other spices were sometimes only ground nutshells; lard was substituted for butterfat in candies, condensed milk and ice cream; tomato catsup consisting of pumpkin, saccharin, and coal tar colors [sic] was not uncommon. A chemical thickener mixed with one pound of butter and a pint of milk quickly produced two pounds of butter. (Wood 1985)
In that sense, adulteration may be considered the “perceptible” (because fraudulent) part of a wider spectrum of practices that clearly affect the welfare of consumers.
1.2. Product downsizing
The first indication of industrial seigniorage concerns size and weight reductions of products whose consequently reduced production costs are not passed on to the consumer. This practice is referred to as “product downsizing” or “hidden price increases.” Although product downsizing cannot be considered a reduction in quality sensu stricto, it adversely affects consumers by offering less value at the same price. As such, the reduction of inputs involved in product downsizing constitutes consumer deception; this practice is therefore included in the definition of industrial seigniorage as its first possible manifestation.
In general, most occurrences of product downsizing are reported in nonscientific journals, newspapers, and other mainstream mass media. Examples include articles written by Martin (2008) and Masters (2013), both of whom list several cases of product downsizing in the grocery sector. Because such cases are often reported by consumers themselves, it may be difficult to gain an academic, scientific, and statistical understanding of such practices. Despite this difficulty, Imai (2013), whose work seems to be the only general statistical evidence for this phenomenon, proposed a statistical and scientific analysis of such practices for Japan. Using daily scanner data of prices and quantities for 26 kinds of products (270,000 items) obtained from 200 Japanese supermarkets between 2000 and 2012, Imai identified 15,000 products affected by substance “replacement” (a new product succeeding an older one). Of these 15,000 replacements, more than one-third (5,173) included a size or weight decrease. Although during the observation period size and weight increased in some product categories (processed goods, kitchen supplies, and cosmetics), both parameters decreased for most other products. Imai notes that this practice is a recent development in Japan: 200 cases were found in the year 2000, compared with 1,460 cases in 2008. However, the study’s most interesting result concerns price responsiveness: the price elasticity coefficient was below unity for the 5,173 products affected by downsizing, meaning that product downsizing had a relatively small effect on changes in price. Imai’s calculated measure of price responsiveness showed that around 75 percent of all downsizing events involved price reductions that were disproportionate to, and smaller than, the corresponding size and weight reductions. Based on the proposed regressions, Imai rejected the hypothesis that firms reduce prices in proportion to a product’s size and weight. Product downsizing is thus often accompanied by a rise in unit prices.
1.3. Fraudulent and nonfraudulent input substitution
In addition to product downsizing, firms also reduce the quantity of inputs by using cheaper ingredients. This second examination of industrial seigniorage, labeled “input substitution,” is based on examples from the French food industry. Although industrial seigniorage cannot be assumed widespread across this sector, the exploratory character of the present investigation relied on data retrieved from extensive annual surveys that provide easily available examples of input substitution in the food industry.
There are two types of input substitution: 1) the possibility of fraudulent input substitution. In France, a survey conducted by the DGCCRF (French: Directorate General for Competition, Consumer Affairs, and the Repression of Fraud, the former office in charge of fraud and anticompetitive practices, now called the “Autorité de la concurrence”) revealed many such occurrences. Testing 992 samples of 6 basic products, the study revealed that 34 percent of the samples were affected by practices that could be labeled industrial seigniorage (Table 1). The highest rates of noncompliance were reported for merguez sausage (traditionally a mutton- or beef-based sausage of North African origin); pork was an either undeclared or underdeclared ingredient (for up to 86.7 percent of the samples).
Fraudulent practices found in the study conducted by the French DGCCRF.
Source: DGCCRF
Evidently, these examples could be disqualified from the definition because they are fraudulent and thus constitute illegal practices. However, a second kind of input substitution exists: nonfraudulent input substitution occurs when producers are legally permitted to use additives as input substitutions to reduce the cost (and price) of products. To show the extensive use of such practices (which are even more widespread than fraud), the present paper summarizes two studies conducted in France and in Belgium that highlight several legal occurrences of nonfraudulent input substitution (see tables 2 and 3 for cases exemplifying the definition of industrial seigniorage). Many everyday products are affected by input substitution (or input reduction/product downsizing). A prominent representative example is lasagna Bolognese (an Italian pasta-based dish commonly made with cheese, tomato sauce, and ground beef) (Table 3). The study, which examined several brands of lasagna (premium/name-brand, store-brand, and generic discount products), revealed that all tested products had low average quantities of meat ranging from 4.8 percent to 24.8 percent. Interestingly, the study reports a lower meat content for the premium brand (17 percent) than for one of the store-brand products (24.8 percent), recommending consumers choose the store-brand product over the premium brand because of a significant price difference: €1.25 for the store brand and €3.14 for the premium brand (of the same weight). Yet, the study also notes that the premium brand lasagna is the only sampled product to include beef (3.5 percent). Surprisingly, the study does not draw all the possible conclusions from this observation. In particular, it neglects to mention that lasagna Bolognese is traditionally prepared with beef as the main ingredient. In fact, all other sampled brands had replaced beef with pork (a much cheaper meat); some of them even contained ham (which is commonly made from reconstituted pork). Consumers ultimately have the choice between paying €1.1 for a lasagna containing 4.8 percent pork (the cheapest product in the test), or paying €3.14 for the product closest to the traditional recipe (containing 3.5 percent beef and 13.5 percent pork). This example shows that the practice of industrial seigniorage is not confined to low-price or discount products; premium brands are affected as well. In that sense, industrial seigniorage does not refer to the simple existence of different quality products; it also affects premium brands and “high quality” products. The notion of “quality” is relative; it has to be considered in relation to other products: in the case of lasagna, what could be called the “best” product has undergone several input substitutions since the “normal” recipe.
Commonplace industrial seigniorage.
Survey conducted by the Belgian institute CRIOC. a
Research and Information Center for Consumer Organizations, Belgium
1.4. Industrial seigniorage in economic policy
Having demonstrated the existence of industrial seigniorage as a practice, the following expands on the concept by attempting to show that the same phenomenon can also be found at the core of some economic policies. Consequently, economic policies have the ability to create the opportunity for firms to reduce or substitute inputs in order to reduce the price of goods. Five examples from the European Union serve to illustrate this idea, in particular four European directives, of which three have been implemented (the other proposal has been abandoned temporarily but may be revived in the future).
Modification of Directive 76/211/EC
This first example of a European directive applies directly to product downsizing. In 2007, the European Union effectively deregulated the size and weight requirements for manufacturers of pre-packaged products, especially food manufacturers. Whereas before 2007 Directive 76/211/EC prohibited producers from selling arbitrarily pre-packaged products, the amended Directive 2007/45/EC now allows manufacturers free choice of their product packaging. Article 7 of the directive stipulates:
Consequently, nominal quantities should generally not be subject to regulation at community or national level and it should be possible to place prepacked goods on the market at any nominal quantity.
This statement clearly creates an opportunity for the generalized practice of product downsizing.
Directive 2000/36/EC —European cocoa and chocolate directive
Directive 23/06/2000 has its origins in the diversity of traditional European chocolate manufacturing practices (there is considerable variance in what constitutes the “notion of chocolate”). Some countries allowed the use of non-cocoa vegetable fats; other countries prohibited it. The ensuing dispute over this divergence of definitions was a barrier to the implementation of the European Common Market. Based on the amounts of non-cocoa vegetable fats (up to 5 percent) permitted in some member countries, the directive imposed all European Union countries to allow the use of vegetable fats, thereby modifying the definition of what constitutes “chocolate” in some countries. Presently, all European chocolate manufacturers can legally substitute cocoa butter with cheaper vegetable fats.
The “rosé” directive
Confronted with disgruntled wine producers, the European Parliament finally halted this proposed directive in 2009. The directive would have authorized the production of rosé wine—which is traditionally made by allowing black grape skins to remain in contact with the juice for a short period—by blending white wine with red wine. This practice represents the essence of the concept of industrial seigniorage: the blending of white wine with red wine to make rosé offers a lower-cost production method that could potentially improve the competitiveness of European winemakers. Faced with South African and Australian competitors (both countries allow the blending of white and red wine to make rosé), European winemakers could have gained an advantage to conquer new markets, especially China. The “rosé” wine directive is a representative example of industrial seigniorage because it changes the fundamental nature of a good, yet continues to present it as the same as before.
Wood shavings in wine
In 2006, Directive 1507/2006 legalized the use of wood shavings in place of barrels to impart a woody taste to wine. Here too, the directive has its origins in a previously existing international practice (South America and South Africa permit the use of wood shavings in winemaking) affecting the price-competitiveness of non-permissive countries in international markets. There are two main consequences to the practice of adding wood shavings to wine: 1) it allows winemakers to appeal to a broader palate by controlling the taste of the wine, and 2) it allows winemakers to reduce production costs (and therefore prices). According to estimates, the cost of producing barrel-fermented wine is €75/hl, compared with €5/hl for the use of wood shavings.
Mince meat patties
On 20 May 2010, the European Parliament rejected a directive that would have allowed the use of “thrombin” in mince meat patties, an additive that can be used to combine meats of various qualities. Sold as “mincemeat patty,” this new kind of reconstituted meat, which would be considerably cheaper to produce, would have been visually indistinguishable from other hamburger-type patties. The directive was rejected, but meat lobbies immediately announced they would return with other similar directives.
In conclusion, these examples show that industrial seigniorage is not only a business practice; it can also become a guiding principle for economic policies aimed at regulating competition. Industrial seigniorage allows firms to gain a competitive advantage in the marketplace while maintaining their profit margins; it can be seen as an organizational principle of competition that is compatible with both price reductions and the maintenance of profit margins.
1.5. Toward a comprehensive synthetic/schematic classification
At this point, it is necessary to introduce a comprehensive classification of industrial seigniorage applicable to the four types of practice previously reviewed: adulteration (the addition of illegal, potentially dangerous substances), product downsizing, fraudulent input substitution, and nonfraudulent input substitution. All of these practices fall under the definition of industrial seigniorage. The proposed definition of industrial seigniorage therefore encompasses all means of reducing input quantities, including the addition of dangerous or fraudulent substances. Adulteration and fraud are incorporated into the definition of industrial seigniorage because the notion of what constitutes legal, illegal, and even dangerous additives is merely a matter of convention and can change at any time and in either direction. The examples given by Wood (1984) clearly show that it can take time to recognize the potential dangers of input substitutions; it may take even longer to prohibit such practices once they are recognized as dangerous. Similarly, the cited European directives illustrate the inherently blurred line between fraudulent and nonfraudulent input substitutions, a definition that can change at any time under the pressures of political regulations and social conventions. Industrial seigniorage is therefore a purely technical practice, independent of the legality or illegality of this practice and substances involved. It also means that product standards cannot be entirely reliable since they can change along with these political regulations and social conventions.
On the other hand, a reduction of input quantities alone is insufficient for the definition of industrial seigniorage. For example, “light” sodas and sugar-free soft drinks do not constitute industrial seigniorage because input reduction is in fact exactly what the consumers demand and what is sold by producers: “light” and sugar-free products are specifically marketed as such, and thus mislabeling or misbranding does not occur. Because input reduction is a commercial argument for producers, there is no incentive to deceive the consumer. The same is true for unleaded gasoline and a range of other products that do not contain substitute ingredients. These products can be considered examples of “normal” or “open” competition, whereas industrial seigniorage always involves some kind of “covert” competition. A clear distinction should thus be made between “normal” and “covert” competitive practices. The two processes differ because their underlying economic strategies differ.
There are thus three distinct frontiers (Figure 1). The first, vertical frontier distinguishes industrial seigniorage from normal modes of competition. The second, horizontal frontier is internal to industrial seigniorage practices and separates dangerous industrial seigniorage from nondangerous methods. The dangerous form corresponds to adulteration. The final, horizontal frontier distinguishes fraudulent from nonfraudulent industrial seigniorage. Fraudulent input substitution can thus be dangerous or not, and nondangerous input substitution can be fraudulent or not. Product downsizing has its own category, corresponding to basic input reduction, which seems the most direct and nondangerous/nonfraudulent form of industrial seigniorage.
Various forms of industrial seigniorage
2. How Is This Possible? – Consumer Behavior, Capitalist Exploitation, and Business Strategy
An immediately apparent very relevant question arises: how is this at all possible? How can these “ersatz” products be successful, and why do consumers not notice the differences in quality/quantity between goods? From a rational point of view, consumers ought to recognize the inferior quality of these goods and feel shortchanged by the price of products. To explain this apparent contradiction, it is thus necessary to re-examine the theory of consumer choice. Lavoie, who proposed a general synthesis of a heterodox/post-Keynesian theory of consumer choice (1992, 1994), identifies six fundamental non-mainstream principles:
– Procedural rationality (first principle): procedural or bounded rationality simply states that agents lack the ability to clearly evaluate all possibilities and distinguish all possible outcomes of a choice. In other words, people usually make decisions that are perceived as reasonable and acceptable choices based on established rules of behavior, convention, or habit.
– Principle of satiable needs (second principle): people’s choices are threshold-sensitive. The utility derived from the consumption of a good tends to zero (for a positive price and for a finite income).
– Separability/irreducibility of needs (third principle): people usually divide and sub-divide their needs into several categories and subcategories with limited degrees of substitutability.
– Subordination of needs (fourth principle): categories and subcategories of needs are not ordered at random in people’s minds, but are ranked hierarchically (basic needs followed by less vital and nonessential needs).
– Growth of needs (fifth principle): people’s hierarchies of needs grow as their income increases (see Georgescu-Roegen 1954).
– Nonindependence (and heredity) (sixth principle): the principle of dependence (or nonindependence) refers to the dependence of people’s choices on the choices made by other members of society. This “dependence effect” was described by Galbraith (1958). Accordingly, a person’s individual choices are made in part based on choices made by other people (imitation). This differs somewhat from the principle of heredity, which stipulates that individual choices depend on the order in which these choices are made. As Lavoie (1992) recalled, this principle had previously been highlighted by Georgescu-Roegen (1954).
The present investigation will focus on the importance of two effects in the development of industrial seigniorage. The following provides a detailed description of these two effects and relates them to the principles described by Lavoie (ibid.).
2.1. Difficulties in evaluating quality
It seems apparent that consumers experience difficulties in evaluating the quality of goods and services. Initially, this phenomenon is connected to the principle of procedural rationality (first principle). Lacking both access to relevant information and the awareness to clearly evaluate all possible outcomes of a choice, consumers may have trouble evaluating the quality of goods and services. This is, however, not new to economic theory. Three kinds of goods are generally found in mainstream economics: 1) goods whose quality can be judged before use (“search goods”), 2) goods that people have to consume before being able to judge the quality (“experience goods”), and 3) goods whose real quality people are unable to discern even after consumption (called “confidence goods” or “credence goods”). Despite the exclusive focus of mainstream economic analysis on the first two kinds of goods, 2 the third category is arguably the most widespread. Even for common staple foods, consumers have a limited ability to objectively judge the quality of their purchase, resulting in certain difficulties to evaluate the quality of the product even after its consumption. This problem occurs because quality is relative: the quality of a good can only be evaluated by comparison with competing products. Thus, a true comparison is only possible if several goods can be assessed simultaneously, that is one product must be consumed immediately after another, a scenario that rarely exists in reality because people generally choose one item over another before consumption. Even when given the possibility to compare between alternatives, the order in which people sample (taste or try) goods and services affects how they judge relative quality. When consumers try several goods at spaced intervals they are engaged in a subjective comparison, contrasting what they feel while consuming a good to what they remember feeling when they consumed the previous one. This judgment can thus be influenced by the initial experience of consuming a good: what is called an “anchoring bias” in psychology. This phenomenon relates to the (sixth) principle of nonindependence: the order in which people make choices influences the choices they make. In conclusion, choices influence preferences and preferences influence choices.
Furthermore, faced with the inability to make an objective judgment, consumers may try to find ex post facto reasons to confirm their belief in a “good choice.” Our human capacity for adaptation to a variety of situations includes the ability to rationalize behavior and to persuade ourselves that we have made the right choice even if we are aware of having made the wrong one. According to American social psychologist Leon Festinger’s (1957) theory of cognitive dissonance, humans strive to reduce internal inconsistencies, which may lead to the ex post facto rationalization of choices, regardless of the person’s initial decision. People are able to adapt their preferences to their choices.
It is important to underline that industrial seigniorage does not necessarily imply fraudulent consumer deception. Unless a product is deliberately mislabeled, anyone can determine the apparent quality of a purchased product by reading the label and evaluating unit prices. In contrast to cases of fraudulent substitutions (Table 1), data in tables 2 and 3 were obtained directly from product labels. Thus, industrial seigniorage is not exclusively a problem of incomplete or asymmetric information. More widely, industrial seigniorage can be an outcome of consumer’s incomprehension and insufficient analysis of otherwise readily available information, or even an outcome of consumer’s lack of attention. Here, it is considered a problem of capitalist exploitation. Firms are able to exploit consumers by taking advantage of the cognitive bias consumers experience in evaluating product quality.
Snir and Levy (2011) noted that quantity rather than price could be the market adjustment variable. Their study, based on two surveys conducted in Israel between 2005 and 2008, noted that consumers were barely able to recall prices and quantities of purchased products even immediately after exiting the supermarket. The second survey reported a mean absolute error on price of 33 percent and a mean absolute error on quantity of 450 percent. The authors, assuming processing quantity information carries higher cognitive costs than processing prices, conclude that the adjustment variable is quantity more often than price.
2.2. Financial and income constraints
Consequently, consumers are confronted with the common human problem of establishing criteria to evaluate quality. However, supposing a consumer manages to overcome all these difficulties and finally arrives at a robust personal evaluation of quality, personal financial and income constraints constitute continual limitations for the majority of consumers faced with decision-making options. Even if the inherent quality of a product was clearly identifiable to the consumer, price differences between potential product choices mean consumers may simply be unable to afford the higher quality product. Thus, people may have no other option but to buy “ersatz” goods for purely financial reasons: their available income may not allow them to purchase the preferred goods. As Snir and Levy (2011) noted, prices enter into the budget constraint, whereas quantity (and/or quality) enters into the utility function. These two elements do not have the same effect on consumer choice: utility is a purely psychological concept, whereas budget constraint is not. Consumers are therefore more likely to be able to adjust their subjective needs than their real/objective constraints.
It follows that competition between producers can take place on the basis of a nominal income constraint: even if the quality of some goods is inferior, their absolute price level makes them a competitive option for consumers who try to satisfy growing, subordinated, and separable needs (Lavoie’s third, fourth, and fifth principle). Recalling the example of lasagna Bolognese presented earlier, a low absolute price level means that the product identified as “lasagna” is accessible to consumers who otherwise might not be able to afford it. Consumers are thus essentially sold the “concept” of lasagna: in our example, the manufacturer sells to the consumer a product resembling traditional lasagna, which has all the visual properties of lasagna, but that can no longer be considered “real lasagna.” Industrial seigniorage is thus completely different from monopolistic competition and/or product differentiation: monopolistic competition aims to convince the consumer of apparent differences between comparatively identical products, whereas industrial seigniorage attempts to convince the consumer of the equivalence of distinctly dissimilar products. Firms are thereby able to exploit the discrepancy between “theoretical freedom” and “actual freedom” of choice of consumers to purchase and consume the goods they prefer.
2.3. Industrial seigniorage: An economic strategy
Given the consumer behavior described above, industrial seigniorage has the potential to become a viable and profitable business strategy on (too) much competitive markets, and may not exclusively relate to monopoly capitalism. In modern mass production and mass consumption economies, goods and services compete with other similar goods but also with all other goods and services, as described by the (fourth and fifth) principle of growing and subordinated needs. By offering cheaper products, producers allow consumers to access goods and services associated with higher needs in their own hierarchy (related to Lavoie’s fourth and fifth principle of subordinated and growing needs). Accordingly, advertising is a way for producers to ensure the success of industrial seigniorage. Galbraith noted that advertising helps producers to control a “revised sequence” by creating a perceived desire or need in the consumer for the promoted product (Galbraith 1967). In the case of industrial seigniorage, advertising plays a much more consequential role: by advertising their products, manufacturers may (indirectly) promote the cheaper product of their competitors, because consumers may feel the need to purchase the promoted product, yet be unable to afford the original version. Industrial seigniorage provides access to the “idea” of a product at a relatively low price, even if the quality of the affordable surrogate is not identical to the original. Advertising can thus create an externality for all producers. Given the added possibility of promoting a competitor’s brand of products, advertising is not merely a means of differentiation; it is not limited to marketing a brand, but extends to the promotion of an entire concept, product, or way of life.
As a business practice, industrial seigniorage can be a means to reduce the price of a product while maintaining or even increasing profit margins. Firms can thus improve their relative position in the marketplace and increase their sales growth by proposing lower-priced goods to consumers (because the presentation of the modified product remains identical to that of the original version) allowing the consumer to buy additional goods. At the same time, firms can maintain profit margins, thereby financing their own growth and capital accumulation (as stated in the post-Keynesian theory of mark-up determination, e.g. Eichner 1973, 1976; Wood 1975). For example, quoting Winter (2001), Gourville and Koehler (2004) recall that the brand PepsiCo reported a “sixth consecutive quarter of double-digit earnings growth” in 2001, which was partly attributed to the company’s “weight-out” strategy of putting “fewer chips in bags of Lays, Doritos, and other Frito-Lay products” (PepsiCo 2001 first quarter press release, quoted by Winter 2001 and reprinted in Gourville and Koehler 2004). Gourville and Koehler (2004) further note that the coffee brand Chock Full o’Nuts first implemented this strategy in 1988, and that a host of other brands subsequently engaged in product downsizing practices (see Masters 2013 and Martin 2008 for additional examples).
Alongside recent economic developments (i.e. globalization and increased international market competition, fall in wage shares in several industrialized countries, widening income inequalities that in turn lead to an increase in ostentatious consumption), industrial seigniorage helps to maintain an illusion of affluence, and allows aggressive commercial pricing strategies to be both successful and financially viable. Industrial seigniorage, often related to monopoly capitalism, can thus also be an outcome of fierce market and price competition.
3. Industrial Seigniorage and Social Issues
3.1. Industrial seigniorage and public health
The link between industrial seigniorage and public health becomes a direct connection for cases in which fraudulent and dangerous substitutions pose a direct risk to public health, possibly in the very short term. The use of adulterants and other toxic inputs may have immediate effects, causing diseases or even deaths. Additionally, an indirect connection exists for the nonfraudulent practice of industrial seigniorage. For example, using pork in place of other meats and replacing meat with fats, both (widespread) practices in the food industry, undoubtedly produces long-term effects on public health. Galbraith already noted the connection between various modern diseases, mass production, and mass consumption (Galbraith 1958; for detailed explanations of Galbraith’s view, see Dunn 2011).
Furthermore, because industrial seigniorage is a means to reduce prices, low-income households are more likely to purchase these cheaper products, resulting in a greater likelihood of lower quality diets for low-income households and potentially creating more long-term health problems. Several studies have pointed out the link between socioeconomic status, economic means (in other words, social class), and diet quality. Darmon and Drewnowski (2008) were able to establish a causal link between socioeconomic status and diet quality by reviewing numerous studies supporting this possible connection. In particular, they note the link between income and diet quality. The relationship extends beyond the (commonly accepted) fact that high-income households benefit from higher education and access to nutritional information; even with equal access to information and education, low-income earners are unable to afford the same high quality diets as high-income households. Industrial seigniorage is thus directly connected to public health problems.
3.2. Industrial seigniorage and early or planned obsolescence
An additional concern is the link between industrial seigniorage and product lifetime. There are recurrent debates in capitalist countries regarding planned obsolescence, which is often treated as a deliberate choice of producers in concentrated or cartelized industries to reduce the lifetime of a product in order to increase unit sales. Industrial seigniorage, however, can lead to another form of obsolescence that could be called early (and indirect) obsolescence. In some respects, using inferior quality components to reduce production costs and lowering the size or weight of a product have the same consequences as planned obsolescence: such practices can lead to shorter product lifetimes and force consumers to renew their purchases more often (see Figure 1). There is a difference in perspective: planned obsolescence is regarded as a pathology of concentration, whereas early obsolescence resulting from industrial seigniorage is caused by (too much) price competition. Early obsolescence is therefore a logical outcome of the system’s operation rather than the product of ill-intentioned firms.
3.3. GMOs—a delicate issue
Genetically modified organisms (GMOs) remain a hotly debated topic with recurrent disputes concerning the quality of GM food products, making it plausible to assign this issue to the category of industrial seigniorage. However, this is a more difficult decision than it seems. Although, superficially, using genetically modified ingredients may seem to be a practice of industrial seigniorage, it must be noted that GM products often require the addition of inputs as well as additional R&D and investment expenses so that, at the economic level, it would seem as though using genetically modified ingredients could be considered the opposite of industrial seigniorage. Research on whether or not the use of GMOs inherently implies a reduction in quality (comparable to adding fillers such as water or fat) remains debated. However, a growing body of literature has found evidence that genetically engineered foods are inferior in nutritional value, at least to organic foods.
As an initial starting point, the concept of “substantial equivalence” is key to comparing GM products with conventional foods. This concept, introduced by the OECD in 1993, stipulates that if a new food is shown to be substantially equivalent to an already existing one, then both foods must be regarded as equally safe. Although early research tended to proclaim the substantial equivalence of GM and conventional foods, numerous studies have now shown that this is clearly not the case. For example, Abdo, Barbary, and Shaltout (2014) discovered a substantial non-equivalence and potential toxicity for GM corn. Bøhn et al. (2014) demonstrated the substantial non-equivalence between GM soybeans and conventional ones, noting an accumulation of glyphosate in Roundup Ready GM-soybeans.
In 2010, a team of nine researchers conducting an interdisciplinary study investigating nutritional quality, tested the fruit and soil quality of 13 paired samples (conventional and organic) of California strawberries at multiple sampling times for two years. The team found that organic strawberries surpassed their conventional counterparts on numerous parameters, which shows that even if the equivalence of GM food and conventionally grown food can be demonstrated, neither produce attains the level of nutritional quality of organically grown food (Reganold et al. 2010). The study further noted that 8 out of 10 recent reviews confirmed the higher nutritional value of organic food (the remaining 2 reviews found no difference). Similarly, Crinnion (2010) recalls that out of 6 recent studies on the nutrient content of organic tomatoes, only one found no difference (the other 5 studies found organic tomatoes to be of higher nutritious quality).
4. Conclusion
A manufacturer reducing the price of a product never reveals whether or not this action involves lower profit margins, labor costs, or product quality. Yet, the act of lowering prices sometimes, if not routinely, implies a reduction in quality. The present paper proposes to coin the term “industrial seigniorage” for this practice because it is represented either by a reduction in the quantity of inputs incorporated into the production process or by the blending of original inputs with cheaper substitutes. Although this practice includes fraudulent cases, it is much broader than fraud and applies to various nonfraudulent practices. It is a myth that competition lowers prices and reduces profit margins, yet never reduces quality. As the present examination has shown, price reductions may come, contrary to the ideology of capitalism, at the expense of the consumer, and quality reductions have the potential to be a successful business strategy by exploiting both the consumer’s inability to evaluate quality and their personal income constraints to afford goods that are more expensive.
Work in this domain remains essentially exploratory. It is a topic worthy of a broader analysis requiring future research. First, additional studies should analyze data available in other countries, which could bring to light other examples of economic policies based on industrial seigniorage. Furthermore, practices of industrial seigniorage likely spread beyond the food industry (e.g. withholding the production of spare parts for industrial goods). In fact, the phenomenon may extend to services for which an evaluation of quality is even more difficult than for goods.
Footnotes
Acknowledgements
I would like to thank the three RRPE referees for their very useful comments. The usual caveats apply.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
1
PB refers to Premium Brands, RB to Retailers’ Brands, and D to discount products.
2
Often admitting the third category requires state intervention.