Our products are safe (don’t tell anyone!). Why don’t supermarkets advertise their private food safety standards?

Large retail chains have spent considerable resources to promote production protocols andtraceability across the supply chain, aiming at increasing food safety. Yet, the majority of consumers areunaware of these private food safety standards (PFSS) and retailers are not informing them. This behaviordenotes a pooling paradox: supermarkets spend a large amount of money for food safety and yet they forgetto inform consumers. The result is a pooling equilibrium where consumers cannot discriminate among highquality and low quality products and supermarkets give up the potential price premium. This paper providesan economic explanation for the paradox using a contract-theory model. We found that PFSSimplementation may be rational even if consumers have no willingness to pay for safety, because thestandard can be used as a tool to solve asymmetric information along the supply chain. Using the PFSS,supermarkets can achieve a separating equilibrium where opportunistic suppliers have no incentive to acceptthe contract.Even if consumers exhibit a limited (but strictly positive) willingness to pay for safety, advertisingmay be profit-reducing. If the expected price margin is high enough, supermarkets have incentive to supplyboth certified and uncertified products. In this case, we show that, if consumers perceive undifferentiatedproducts as “reasonably safe”, supermarkets may maximize profits by pooling the goods and selling them asundifferentiated. This result is not driven by advertising costs, as we derive it assuming free advertising.[...]