Getting Something From Nothing: An Investigation of Beef Demand Expansion and Substitution in the Presence of Quality Heterogeneity

A relative increase in demand for quality can have one of two potentially countervailing effects: it can cause substitution of one quality for another and/or it might expand overall demand by bringing new consumers into the market. This article investigates demand expansion and substitution among beef qualities by exploiting the use of a no-purchase option in a nonhypothetical choice experiment involving real food and real money. A random parameters logit model, which permits very flexible substitution patterns, is used to show that expanding demand for high quality rib-eye steak increases revenue by a greater degree than expanding demand for low quality steak. Regardless of whether high or low quality demand is expanded, the expansion effect dominates the substitution effect. We also show that the introduction of a new “"natural”" steak causes a greater reduction in market share for high quality than low quality beef, but despite this overall steak demand increases. These results have important implications for the manner in which collective advertising is conducted and for the effects of new product introductions on industry profitability.