Review
State of the art in benefit–risk analysis: Economics and Marketing-Finance

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Abstract

All market participants (e.g., investors, producers, consumers) accept a certain level of risk as necessary to achieve certain benefits. There are many types of risk including price, production, financial, institutional, and individual human risks. All these risks should be effectively managed in order to derive the utmost of benefits and avoid disruption and/or catastrophic economic consequences for the food industry. The identification, analysis, determination, and understanding of the benefit–risk trade-offs of market participants in the food markets may help policy makers, financial analysts and marketers to make well-informed and effective corporate investment strategies in order to deal with highly uncertain and risky situations.

In this paper, we discuss the role that benefits and risks play in the formation of the decision-making process of market-participants, who are engaged in the upstream and downstream stages of the food supply chain. In addition, we review the most common approaches (expected utility model and psychometrics) for measuring benefit–risk trade-offs in the economics and marketing-finance literature, and different factors that may affect the economic behaviour in the light of benefit–risk analyses.

Building on the findings of our review, we introduce a conceptual framework to study the benefit–risk behaviour of market participants. Specifically, we suggest the decoupling of benefits and risks into the separate components of utilitarian benefits, hedonic benefits, and risk attitude and risk perception, respectively. Predicting and explaining how market participants in the food industry form their overall attitude in light of benefit–risk trade-offs may be critical for policy-makers and managers who need to understand the drivers of the economic behaviour of market participants with respect to production, marketing and consumption of food products.

Highlights

► Benefit–risk approaches rooted in business economics, marketing-finance, and psychology rely on utility concept. ► Two established approaches in business economics: (a) the expected utility approach, and (b) the psychometric approach. ► The decoupling of individual market participants’ benefit–risk trade-offs may be a more robust predictive framework.

Introduction

The food industry as a whole is undergoing structural changes in terms of internalisation, concentration and network relationships (Zylbersztajn and Omta, 2009, Baourakis et al., 2011). The successive and intensive liberalisation of markets forces the food industry to respond to rapid and radical changes in the marketplace through globalisation and large-scale operations (King et al., 2010). Understanding economic behaviour (e.g., risk-returns and/or benefits-risks) at different stages (e.g., production, retailing, consumption) of the food supply chain is critical in formulating updated and well-informed public economic policies, corporate investment and marketing strategies (Meulenberg, 2000, Kalogeras, 2010).

Recent research in agribusiness economics, finance, and marketing has put the underlying decision-making process of market participants (e.g., investors, producers, consumers) in the spotlight (Kalogeras, 2010). For instance, to study the preferences and choices of end-users, consumers, in the food supply chain, it is important to understand how they evaluate derived benefits and potential risks associated with food consumption (Siergist, 2000, Costa-Font and Mossialos, 2007, Fischer and Frewer, 2009). Hence, attention is centred on the trade-offs between benefit and risk behaviour of market participants engaged in the food markets. The question that emerges is how one can evaluate the drivers of economic behaviour (e.g., preferences, decisions, choices) of market participants in light of benefit–risk analysis in the food domain. Failure to identify and evaluate the impact of benefits and risks on economic behaviour, as well as the impact of factors driving the benefit–risk trade-offs associated with investments in food production, processing, marketing, and consumption, may result in, for instance, a dramatic decrease in production and consumption of certain food products. This decrease, in turn, may have catastrophic economic consequences for the food industry and disrupt the economic relationships in the food markets and society as a whole (Pennings et al., 2002, Wansink, 2004, Cleeren et al., 2008, Van Heerde et al., 2007).

In this paper, we review the business economics and marketing-finance literature regarding the drivers of benefits and risks of market participants engaged in the food industry. To address the subject matter of this review (benefit–risk analysis for foods), we aim to provide a new perspective based on lessons that could be learnt from business economics analysis. Throughout our review, we address issues related either to economic risks and benefits and their impact on the profitability of agribusinesses and consumption of food products, or to consumer health risks and benefits caused by the impact of different market forces on food supply chains. Although these two perspectives (economic and health-related risks and benefits) may be considered somehow different, benefit in one may pose a risk in the other. For instance, there are certain benefits for farmers when commodity prices increase, however this may pose a risk to consumers. That is, consumers who have certain income constraint may alter their purchasing habits. They may shift from buying nutritious food to less nutritious food and, in turn, they may face the consequences resulting from their poor diet choices.

The paper is structured as follows. We first discuss the role of risks and benefits and the impact that both concepts have on economic behaviour in different decision contexts related to agribusiness and food domains. Next, we briefly review the most common risk and benefit measures. Third, we introduce a conceptual framework of benefit–risk behaviour with respect to the food choice. We argue that by decoupling the benefit–risk behaviour of market participants into the separate components of risk attitude and risk perception and utilitarian and hedonic benefits, respectively, we may develop the basis of a generic conceptualisation that may allow better prediction of market participants’ behaviour in food markets. This, in turn, may provide answers as to how public policy-makers, industry managers and marketers in the food industry can deal with different segments of market-participants in highly uncertain and risky market environments (e.g., globalised product-harm crises). Moreover, knowing the drivers of benefit–risk trade-offs may provide insights into whether the solutions to market situations entailing high risk and uncertainty may rely on more drastic measures (e.g., elimination of the risk content) or investing in more effective communication strategies (e.g., retrieval and/or storage strategies).

Section snippets

Benefit–risk behaviour of market participants

Risk is a key component of economic behaviour.1 All market participants accept a certain level of risk as necessary

Benefit–risk trade-offs: measurement issues

Extensive research has been done on how to measure benefit–risk trade-offs. In the literature, two major approaches towards risk attitude measurement can be distinguished: measures derived from the utility framework (von Neumann and Morgenstern, 1947, Schoemaker, 1982, Fishburn, 1988), and measures derived from psychometrics (e.g., Miller et al., 1982, MacCrimmon and Wehrung, 1986, Shapira, 1995). Since the way in which risk attitude is conceptualised and measured affects our understanding of

Proposed research framework

After reviewing the theoretical, methodological, and measurement advances in decision-making under risk, by making special references related to the context of this review paper (i.e., benefit–risk analysis in business economics and marketing-finance), we propose a conceptual model that is based on the decoupling of risks and benefits into different components. That is, our proposed conceptualisation is based on new risk management theory and avoids the methodological and measurement biases

Conclusions

The identification and evaluation of the factors that drive the benefit–risk trade-offs of market participants are important issues in business economics and marketing-finance. The dominant paradigm that economists, financial analysts and marketers mostly rely on their evaluations regarding the benefit–risk trade-offs of market participants (e.g., food producers, consumers) is the expected utility model. Yet, recognising that the decision-making process may have a dual facet (e.g., cognitive

Conflict of Interest

The authors declare that there are no conflicts of interest.

Acknowledgements

The preparation of this manuscript was funded through the Safefoodera project BEPRARIBEAN (project ID 08192) by the Dutch Food and Consumer Product Safety Authority (VWA), the Research Council of Norway (RCN) and the Nordic Council of Ministers (NCM), and supported by MATIS, The National Institute for Health and Welfare (THL) and Ulster University.

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