Consumers' activism: the cottage cheese boycott

• Author: Saul Lach,Igal Hendel,Yossi Spiegel
• Published date: 01 December 2017
• DOI: http://doi.org/10.1111/1756-2171.12212
• Date: 01 December 2017

RAND Journal of Economics

Vol.48, No. 4, Winter 2017

pp. 972–1003

Consumers’ activism: the cottage cheese

boycott

Igal Hendel∗

Saul Lach∗∗

and

Yossi Spiegel∗∗∗

We study a consumer boycott on cottage cheese, organized in Israel on Facebook in the summer

of 2011 following a steep price increase since 2006. The boycott led to an immediate decline in

prices, which remain low even six years later. We find that (i) demand at the start of the boycott

would have been 30% higher but for the boycott, (ii) own- and especially cross-price elasticities

increased substantially after the boycott, and (iii) post-boycott prices are substantially below the

levels implied by the post-boycott demand elasticities, suggesting that firms were concerned with

public backlash due to high prices.

1. Introduction

Consumer activism, and boycotts in particular, can serve as an effective countermeasure

to market power. Consumers can discipline firms directly through product boycotts and can also

affect business strategy by exerting public pressure on regulators to intervene on their behalf

(Wolfram, 1999; Ellison and Wolfram, 2006). We study these intertwined aspects of consumer

activism as they evolved during the consumer boycott of cottage cheese organized in Israel on

Facebook during the summer of 2011.

The cottage cheese boycott was intended to pressure firms to lowertheir prices. The price of

cottage cheese, which is a staple food in Israel, increased by 43% since deregulation in 2006 (The

Knesset Research and Information Center, 2011). Following the steep increase, and the ensuing

∗Northwestern University; igal@northwestern.edu.

∗∗The Hebrew University of Jerusalem and CEPR; Saul.Lach@mail.huji.ac.il.

∗∗∗Tel Aviv University,CEPR, and ZEW; spiegel@post.tau.ac.il.

Wethank Steve Berry, Tim Feddersen,Andrea Ichino, Robin Lee, Jesse Shapiro, Manuel Trajtenberg, Christine Zulehner,

and seminar participants at The Hebrew University, The London School of Economics, the 2014 “The Economics of

Information and Communications Technologies”conference in Paris, the 2014 IIOC meetings in Chicago, the JIE-CEPR

applied Industrial Organization in Athens, and the 2014 Economics of ICT conference in Mannheim, for useful comments.

We also thank Dan Aks and Max Bocharenko for excellent research assistance. Lach gratefully acknowledgesfinancial

support from the Israel Science Foundation (Grant no. 858/11) and from the WolfsonFamily Charitable Trust.

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extensive news coverage, a Facebook event calling for a boycott of cottage cheese was created

on June 14, 2011, demanding a price reduction from about 7 New Israeli Shekel (NIS) to 5 NIS

per 250-gram container.1The Facebook event was an instant success: a day after it started, nearly

30,000 Facebook users joined it; by June 30, the number surpassed 105,000. The boycott was

also a success as the average price of cottage dropped by 24% virtually overnight, and it remains

well below the 2011 price even today, more than six years after the boycott. This long-lasting

effect is due not only to consumers becoming more price sensitive after the boycott, but also to

firms’ realization that they cannot ignore the possibility that increasing prices may trigger massive

public backlash in the form of renewed government regulation in the market.

Social media such as Facebook and Twitter play an increasinglyimportant role in facilitating

political mobilization.2It is therefore not surprising that social media can also become a powerful

tool for mobilizing consumers to pressure firms to lower prices, as the cottage cheese boycott

demonstrates. Another recent example, also organized via social media, 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.3Because of the rapid and widespread growth of social media,

we are likely to witness more such cases in the future, and the lessons from the cottage cheese

boycott should therefore be of interest to consumers, firms, and policy makers alike.

We use daily, store-level data from all supermarkets and most grocery stores in Israel to

estimate a demand system which we use to quantify the harm the boycott inflicted on firms, to

study its long-run impact on demand and, finally, to understand firms’ reactions to the boycott.

Our main findings are as follows. First, we use the estimated demand functions to compute

counterfactual sales during the boycott. Given the new low prices, sales at the start of the boycott

would have been 30% higher, but for the boycott. The effect was particularly strong in areas with

higher exposure to social networks. After about six weeks, however,sales recovered and matched

the expected demand at observed prices.

Second, the boycott had a long-lasting impact on demand. Comparing estimated demand

before and after the boycott, we find substantially higher own- and especially cross-price elas-

ticities after the boycott, possibly reflecting increased price awareness and more willingness to

substitute across brands. Interestingly, the magnitude of these changes is not uniform and varies

across brands. The increased price elasticities inflict an additional harm on firms by forcing them

to set lower prices.

Third, we follow the industrial organization tradition and use the conditions for a Nash

equilibrium in the cottage cheese market, together with the estimated price elasticities, to show

that the observed price decline following the boycott wasmuch larger than the decline implied by

the increase in demand elasticities. This unexplained part of the observed price decline could be

due to firms’ concerns about the boycott spreading to other products and their wanting to protect

their brand and image, and also to their concern about public backlash in the form of regulatory

intervention or class action lawsuits. Toexamine the latter possibility, we present a simple model

of firm behavior under the threat of public backlash in the spirit of Glazer and McMillan (1992)

and Tanaka (2011). Using the model, along with our demand estimates and external information

on the marginal cost for one of the brands, we proxy the cost of public backlash from the brand

manufacturer’s perspective due to a price increase. We find that the boycott increased the cost

of potential public backlash due to a price increase, as perceived by the manufacturer, by 63%

1See www.facebook.com/events/203744079670103/.

2The 2009–2010 Iranian election protests and the 2011 uprisings in Egypt and Tunisia are often referred to as

“the Facebook revolution” or “the Twitter revolution” (Andersen, 2011). Facebookand Twitter played an important role

in facilitating protests in Bulgaria, Turkey, Brazil, and Bosnia in 2013 (e.g., Faiola and Moura, 2013) and in Russia in

2011–2012 (Enikolopov, Makarin, and Petrova,2016).

3A month after the boycott started, Bank of America announced that “We have listened to our customers very

closely over the last fewweeks ... As a result, we are not currently charging the fee and will not be moving forward with

any additional plans to do so” (Siegel Bernard, 2011).

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per unit of cottage cheese. To put the extra cost in perspective, the post-boycott fear of backlash

makes firms behave as if their marginal cost were 18% lower than they really are.

Our findings highlight the limitations of using first-order conditions, and elasticities, to

capture firms’ incentives. This traditional industrial organization approach may miss important

considerations which affect firm behavior, such as reputation, image, and the concern for regula-

tory intervention. The threat of regulation appears to have shaped the pricing of cottage cheese,

but such incentives are not captured in the traditional analysis. The cottage boycottwas successful

partly because it put pressure on policy makers to act which, in turn, induced firms to restrain

their prices.

There is a small empirical literature that examines firms’ pricing to curb public pressure for

regulatory intervention. Erfle and McMillan (1990) show that during the 1979 oil crisis, major

US oil firms held down the prices of home heating oil and diesel fuel more than the prices of

less visible fuels used by electric power generators, because the former were subject to public

scrutiny and therefore likely to trigger regulatory intervention. The effect was greatest for highly

visible firms. Wolfram (1999) finds that the markups of British electricity generators were below

average in the four weeks after the energy regulator has released price statements expressing

dissatisfaction with the high prices of electricity, but were above average in the four weeks

preceding the release of the price statements. Electricity generators appear to restrain prices

after the statements are released and attract public attention but may deliberately raise prices

before the statements are released, realizing that contemporaneous price data is not incorporated

into the price statements. Ellison and Wolfram (2006) find evidence that pharmaceutical compa-

nies possibly altered their price increases during the early years of the Clinton administration to

forestall potential regulatory intervention. Similarly,Stango (2003) reports that credit card issuers

lowered interest rates following threatened legislation to cap rates.

The additional considerations that appear to have influenced firms (fear of the spread of

the boycott, of reregulation, etc.) also constitute the main difference between our article and

other articles on consumer boycotts. Most of these articles study “proxy boycotts,” namely,

boycotts in which firms are punished as a proxy for their country of origin. Proxy boycotts have

a fundamentally different underlying cause than boycotts intended to curb market power and,

more importantly, have little implications for business strategy and public policy, as firms cannot

do much to avert the harm. The cottage boycott, instead, was geared to counter market power.4

Consumer activism on social media was apparently ableto discipline fir ms and had a long-lasting

impact on business strategy. For example, in January 2013, the Chief Marketing Officer of Tnuva

(the market leader), said in the annual meeting of the Israel Marketing Association that “The

cottage cheese crisis taught us a lesson of modesty and humility” and in July 2013, Tnuva’s Chief

Executive Officer said that “The cottage protests caused Tnuva to emphasize the opinion of the

consumer and his needs. Part of this policy is putting cottage under self-regulation.” The notion

of self-regulation seems to be working: the Ministry of Agriculture and Rural Development

(MOAG) decided to reregulate the price of “white cheese” (a close substitute for cottage cheese,

that was deregulated around the time cottage cheese was deregulated) as of the start of 2014 due

to “exceptional profitability” but found no need to reregulate the price of cottage cheese for the

time being, because it did not find “unreasonable profitability as in the past.”5The cottage boycott

demonstrates that consumers can indeed get organized on social media and apply pressure on

manufacturers and retailers to lower prices.6

4The cottage boycott is an example of privatepolitics (e.g., Baron, 2003, and Baron and Diermeier, 2007), where

dairy manufacturers and retailers seem to be self-regulating due to consumers’ activism, as in the Bank of America, Wells

Fargo, JPMorganChase, and SunTrust cases mentioned earlier.

5The ministry stated, however, that it will continue to monitor the profitability of cottage cheese, and it did not rule

out reregulation should its profitability become “unreasonable” (MOAG,2013a).

6For analysis of self-regulation, see Harrison and Scorse (2010) and Abito, Besanko, and Diermeier (2016).

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