by Matthew G. Nagler, Associate Professor, Economics and Business, Colin Powell School for Civic and Global Leadership
About six weeks ago, the New York State Attorney General’s office released a report accusing GNC, Target, Walgreens, and Walmart of selling fraudulent dietary supplements. The AG had DNA-tested 24 products from the retailers representing seven supplement types— including such popular products as gingko biloba and St. John’s Wort. All but five of the products were found to contain DNA that was either unrecognizable or from a plant other than what the product claimed to be—including in some cases little more than powdered rice or house plants.
These findings were no big surprise to Edward J. Kennelly, Professor of Biology at Lehman College and the Graduate Center of the City University of New York (CUNY), Fredi Kronenberg of Stanford University, or Bei Jiang of Dali University in China. The three biologists collaborated several years ago on a study of black cohosh, a plant-derived supplement marketed over-the-counter as a cure for hot flashes. They analyzed 11 products and found that three contained no black cohosh, while a fourth that did contain it was also contaminated with a “cousin” plant species. The results of their study are published in the Journal of Agricultural and Food Chemistry.
Shortly after that study was completed, Mr. Kennelly and I met at a CUNY awards dinner. His research results had raised an important question: While, as scientists, his team had been able to identify fraudulent supplements in the lab, was there any way that consumers could ferret out the frauds? This, I knew, was a question economic analysis could answer. Soon Mr. Kennelly, his collaborators, postdoctoral student Chunhui Ma, and I joined together to do a market-focused study of black cohosh adulteration, the results of which are published in the International Journal of Marketing Studies. Our findings lent support to the notion that dietary supplements are an example of what’s called a credence good, a product for which the quality cannot be determined conclusively by consumers even after they buy and use it. Auto repairs offer the classic example. Suppose I take my car to a mechanic for a routine check-up, and he tells me that the transmission is about to fail and needs to be replaced. Fifteen hundred dollars later, I leave the repair shop and find my car drives no differently than when I had brought it in. I can’t tell whether the car needed the repair to begin with, or even whether the repair was executed. I have to take these things on faith. Dietary supplements function similarly–largely because no medication is 100 percent effective, and because sometimes people just get better on their own. This means a consumer cannot rely on what happens when she takes the supplement as an indication of whether it is a fraud or not.
But were consumers able to separate the good from the bad? To determine this, we used a modified version of what economists call “hedonic analysis,” in which the researcher takes the relationship of a product’s observable characteristics to its price as a measure of which characteristics are valued by the market. We turned the standard approach inside out, looking at whether something that the market clearly values but can’t directly observe—authenticity—influences a product’s price. This could tell us whether consumers were getting a clue about authenticity in sufficient numbers to move the market price up or down—by flocking to it or running from it—based on whether the product was or was not a fraud. It turns out they weren’t. They did not have a clue which products were the frauds and which were not.
When something is a credence good, there are two ways the consumer might be protected against fraud. One is through the force of reputation. But because with credence goods people cannot figure out for sure if a product was a fraud even after they use it, they have nothing unequivocal to pass along via word-of-mouth, in chat rooms, or in online product reviews. Consumers who look to reputational sources for helpful information are less likely to find it. Brands that have perpetrated a fraud can get away with it for a long time before enough negative feedback accumulates to effectively bring them down.
Indeed, credence goods and their reputation can be as unreliable as praise for the emperor’s new clothes. Suppose a few early adopters of a fraudulent supplement happen to get a good outcome and squawk about it online. This puts pressure on others to corroborate the positive hype. If the consensus is that the brand is a miracle cure, those consumers who have a different experience may question their own, correct perception and might stifle their criticisms. Things can persist this way for some time—with countless consumers throwing good money after bad.
So that leaves a second source of protection: regulatory oversight. In the United States, dietary supplements are regulated under the Dietary Supplement Health and Education Act (DSHEA). DSHEA’s rules regarding labeling and good manufacturing practices more closely resemble those that govern foods than the Food and Drug Administration (FDA)’s rigorous pharmaceutical regulations. Accordingly, supplements require no premarket clinical testing or approval. Since DSHEA was enacted in 1994, the number of products to which it has applied has grown from 4,000 to approximately 30,000.
Meanwhile, funding for supplement oversight has declined, with the result that the agency has recently faced severe constraints in its efforts to enforce its relatively meager rules against mislabeling and contamination. The Republican-dominated Congress that enacted DSHEA clearly intended for the consumer to take personal responsibility when shopping for supplements – to recognize that, as the labels say, any claims made by manufacturers are “not evaluated by the FDA.” But even if one assumes that buyers are up to the rigors of self-protection, shouldn’t they at least have the assurance that the supplement contains what its label says it does? Our study shows that even the most cautious consumer is unlikely to be able to determine the authenticity of a product.
We should be grateful for interventions by authorities with the ability to scrutinize supplements scientifically and call out the frauds. Like the little boy in Andersen’s story who called it as he saw it, they provide an indispensible service to the public. And, while it may be an unrealistic wish given our current Congress, our findings and those of the New York Attorney General point to an irresistible conclusion: It is time to revisit DSHEA and put in place stronger regulations on dietary supplements.
Matthew Nagler is an associate professor at the Colin Powell School of Civic and Global Leadership, City College of New York: http://mnagler.ccny.cuny.edu/ Note: This post has been edited from an earlier published version.