Cottage cheese and the economics of social media protests

Social media such as Facebook and Twitter play an increasingly important role in facilitating political mobilisation. The 2009-2010 Iranian election protests and the 2011 uprisings in Egypt and Tunisia are well known examples, but social media also played a major role in the popular protests in Bulgaria, Turkey, Brazil, and Bosnia in 2013 (Faiola and Moura 2013) and it also seems to have affected voter turnout in elections in Italy (Campante et al. 2013) and in the UK (Gavazza et al. 2015).

Recently, some commentators have argued that social media can also become a powerful tool for consumers to get organized and put pressure on firms to lower prices or act in a more socially responsible manner (Taylor 2011 and Mainwaring 2011). This possibility has potentially far reaching implications for regulation and for business strategy. For example, if consumers can discipline firms, then antitrust agencies should be less concerned with the adverse effects of market power when they review horizontal mergers or examine vertical restraints. Likewise, firms should pay much more attention to consumers’ sentiments and avoid the temptation to fully exploit their market power in the short run.

A recent example for how social media can help consumers organize and protest against firms’ pricing is the 2011 boycott on Bank of America, Wells Fargo, JPMorgan Chase, and SunTrust following their plan to charge a $5 monthly fee on debit cards. The banks succumbed to the pressure and abandoned their plan.

Hendel, Lach, and Spiegel (2015) study another example: the consumer boycott on cottage cheese organised in Israel on Facebook during the summer of 2011. Cottage cheese is a staple food in Israel and is produced exclusively by three of the four largest food suppliers in the country (that is, there are no imports of cottage cheese). Until 2006, the price of cottage cheese was regulated. After deregulation, the price rose sharply and by the summer of 2011, it reached 7 NIS ($1.82) per container on average, about 43% higher than in 2006. Although food prices in general increased during that period, cottage cheese became a symbol for the price hikes. Following extensive news coverage of these high prices, a Facebook event was created on 14 June 2011, calling for a boycott on cottage cheese unless its price drops to 5 NIS ($1.30). The event received wide coverage in the traditional media and within two weeks it was joined by more than 105,000 Facebook users.

The events that unfolded are documented and analysed in Hendel et al. (2015) using daily store level data on revenues and quantities from all supermarkets and most grocery stores in Israel from January 2010 until the end of April 2012.

The data show that the boycott had an immediate effect on prices: several supermarket chains started offering cottage cheese and other dairy products at special promotional prices. As Figure 1 shows, the average price of cottage cheese dropped virtually overnight by 24% to about 5.5 NIS ($1.43) per container. The price remained at the new level until the end of our sample period (April 2012) and, even today it is under 6 NIS ($1.56) in most stores.

Figure 1. Daily mean price of cottage cheese by brand

Given the immediate 24% price decline, it should not come as a surprise that observed quantities dropped only slightly during the first week of the boycott, and then rose despite the boycott. To assess the effect of the boycott on demand after taking into account the new low prices, Hendel, Lach, and Spiegel (2015) estimate demand functions at the brand level, allowing the demand parameters to change after the boycott. The estimates are then used to compute a boycott index which measures how much lower demand is relative to what it would have been at observed prices, but for the boycott.

The boycott index presented in Figure 2 shows that given the new low prices, demand at the start of the boycott would have been 30% higher but for the boycott. The boycott inflicted a substantial burden on firms. The impetus was short lived, as it fizzled within a couple of weeks despite the fact that the boycotters’ demands were never met in full.

Figure 2. Boycott impact-on-demand index (all brands)

A closer look at the data shows that the boycott had a stronger negative effect on demand in areas with more educated and less religious population and in areas where more households had a computer, a mobile phone, and an internet connection. To the extent that these variables are positively correlated with exposure to social media, these findings suggest that the boycott had a stronger effect on demand in areas with a higher exposure to social networks.

While the boycott impact on demand was short lived, Hendel, Lach, and Spiegel (2015) show that following the boycott, own-brand price elasticities for cottage cheese increased substantially (in absolute value), while cross-brand price elasticities increased on average five-fold. It appears that the boycott had a long-term effect on consumer behaviour, possibly due to increased price awareness and more willingness to substitute across brands.

Interestingly, substituting the post-boycott elasticities of demand, as well as estimates for the marginal cost of each brand (from the pre-boycott estimates), into the first-order conditions for profit maximisation, reveals that prices should have declined by no more than 5-8%. Yet, in practice, prices dropped by 24% below their pre-boycott levels, suggesting that firms restrained themselves following the boycott. Indeed, on January 2013, the Chief Marketing Officer of Tnuva said that “[t]he cottage cheese crisis taught us a lesson of modesty and humility” and on July 2013 Tnuva’s CEO said that “[t]he cottage protests caused Tnuva to emphasise the opinion of the consumer and his needs. Part of this policy is putting cottage under self-regulation.”

What might explain this self-restraint? There could be several, not mutually exclusive, possibilities:

• First, firms might have tried to contain the damage to their reputation and image;
• Second, it is plausible that firms were concerned about possible government intervention in the form of price control and opening the market for imports;
• Third, firms may have been concerned with the possibility that consumers may file class actions lawsuits on the grounds that firms abused their market power.

These fears have proven to be justified. Shortly after the boycott started, the government appointed a committee to review the level of competition and prices in Israel in general and in the dairy market in particular. Among other things, the committee recommended a gradual opening of the dairy market to competition, removing import tariffs, and eliminating the exemptions to produce distributors from antitrust action. These reforms could potentially harm the large dairies which enjoyed government protection until then.

In addition, the Israeli Antitrust Authority raided Tnuva’s headquarters in October 2011 and, according to the press, seized a McKinsey report which advised Tnuva back in 2008 to raise prices by at least 15% due to the low elasticity of demand. In retrospect, it seems that this advice backfired and contributed to the public backlash against Tnuva.

The concern for class action lawsuits seem particularly relevant for Tnuva which was declared a monopoly in the ‘milk and milk products’ market by the (IAA) back in 1989 (the declaration can serve as prima facie evidence for the firm’s dominant position in any legal proceeding). Indeed, several class action lawsuits have been filed against Tnuva since the boycott, alleging that Tnuva has charged excessively high prices on its dairy products including cottage cheese.

The above considerations affect firm behaviour in a way which is not captured by the standard first order conditions for profit maximisation. Among other things, this suggests that the tradition in the discipline of industrial organization of using first order conditions to impute markups may miss important considerations about the business environment which are not reflected in the demand function. These considerations might be important. For example, Borenstein (2015) argued recently that clean gas prices in California are below their (short run) profit maximising levels, possibly due to the concern of oil producers that higher prices may trigger market reforms which will diminish the value of their investments in clean gas. Back in Israel, the self-regulation of cottage cheese producers seems to be working: after examining the dairy market at the start of 2014 and deciding to re-regulate a few products, the ministry of Agriculture and Rural Development found no need to re-regulate the price of cottage cheese for the time being.

The cottage cheese boycott shows that social media can indeed facilitate consumer coordination and allow them to apply pressure on firms to lower prices and on politicians to act in order to curb market power. Firms seem to react to these threats and set prices not only on the basis of demand elasticities, as traditional analysis in industrial organisation assumes, but also on the basis of the business environment, which is not easily captured by traditional analysis, but seems to be of first order importance.

References

Borenstein, S (2015), keynote speech at the 13th annual International Industrial Organization Conference, Boston Park Plaza, Massachusetts: Boston.

Campante, F, R Durante, and F Sobbrio (2013), “Politics 2.0: The Multifaceted Effect of Broadband Internet on Political Participation”, NBER Working Paper No. 19029.

Faiola, A and P Moura (2013), “Middle-Class Rage Sparks Protest Movements in Turkey, Brazil, Bulgaria and beyond”, Washington Post, 28 June.

Gavazza, A, M Nardotto, and T Valletti (2015), “Internet and Politics: Evidence from UK Local Elections and Local Government Policies”, mimeo.

Hendel I, S Lach and Y Spiegel (2015), “Consumers’ Activism: the Facebook boycott of Cottage Cheese“, CEPR Discussion Paper 10460, March.

Mainwaring, S (2011), “The New Power of Consumers to Influence Brands”, Forbes, 9 July.

Taylor, C (2011), “How social media are amplifying customer outrage”, CNN, 22 July.

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Igal Hendel is Ida C. Cook Professor of Economics and co-director of the Center for the Study of Industrial Organization at Northwestern University. Saul Lach is a full professor at the Department of Economics, The Hebrew University of Jerusalem, Israel. Yossi Spiegel is a Full Professor at the faculty of Management at Tel Aviv University and a research fellow at the CEPR and ZEW.

Image: People holding mobile phones are silhouetted against a backdrop projected with the Twitter logo. REUTERS/Kacper Pempel.