Regulating food risk management—a government–manufacturer game facing endogenous consumer demand

• Author: Jun Zhuang,Cen Song
• Published date: 01 November 2018
• DOI: http://doi.org/10.1111/itor.12269
• Date: 01 November 2018

Intl. Trans. in Op. Res. 25 (2018) 1855–1878

DOI: 10.1111/itor.12269

INTERNATIONAL

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IN OPERATIONAL

RESEARCH

Regulating food risk management—a

government–manufacturer game facing endogenous consumer

demand

Cen Songaand Jun Zhuangb,∗

aSchool of Business Administration, China University of Petroleum, Beijing, China

bDepartment of Industrial and System Engineering, University at Buffalo, SUNY, NY, USA

E-mail: songcen22@126.com [Song]; jzhuang@buffalo.edu [Zhuang]

Received 1 April 2015; received in revised form 4 January2016; accepted 5 January 2016

Abstract

In the food industry, manufacturers may add some chemical additives to augment the appearance or taste of

food. This may increase thefood demand and sales profits, but may also cause health problemsto consumers.

The government could use a punishment policy to regulate and deter such risky behavior but could also

benefit from economic prosperity and tax income based on their revenues. This generates a tradeoff for

the government to balance tax income, punishment income, and health risks. Adapting to government

regulations, the manufacturers choose the level of chemical additives, which impacts the consumer demand.

To our knowledge, no prior work has studied the strategic interactions of regulating the government and

the manufacturers, faced with strategic customers. This paper fills this gap by (a) building a government-

manufacturermodel and comparing the corresponding decentralized and centralized models; and (b) applying

the 2008 Sanlu food contamination data to validate and illustrate the models.

Keywords:supply chain management; risk analysis; game theory; production

1. Introduction

There has been a significant growing literature focusing on health and safety in the food industry.

Fearneand Hughes (1999) provide several success factors for the United Kingdom’sfresh produce in-

dustry, including continuous investment, good staff, volume growth, improvement of measurement,

control of costs, and innovation. Patil and Frey (2004) apply and compare different sensitivity anal-

ysis methods to assess food safety with complex models and recommend robust-independent meth-

ods. Roth et al. (2008) develop the “Six T’s” (traceability, transparency, testability, time, trust, and

∗Corresponding author.

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1856 C. Song and J. Zhuang / Intl. Trans. in Op. Res. 25 (2018) 1855–1878

training) of supply chain quality management, which are critical to preserve public welfare through

a safe food supply. Food may contain a significant amount of chemical additivesthat could be added

during the production, transportation, and storage stages throughout the food industry. On one

hand, potential benefits of using food additivesinclude preservation, provision of vitamins or miner-

als, and enhancement of the foodtexture, appearance,and flavors.Liu (2003) points out that additive

and synergistic combinations of phytochemicals are good for health. On the other hand, Watt and

Marcus (1980) point out that undegraded carrageenan as a food additive is harmful for users.

1.1. Food incidents and regulations

There havebeen several food contaminationincidents in recent years. Forexample, in 2007, some dog

food and catfood brands (including Americas Choice,PreferredPet, and Authority) were recalled due

to contamination of using a foodadditive called “wheat gluten” (US Foodand Drug Administration,

2008), where veterinary organizationsreported more than 100 pet deaths among nearly 500 cases of

kidney failure (Associated Press, 2007). In 2008, the Chinese Sanlu company adulterated industrial

chemical melamine into milk powder, which killed at least six infants due to kidney stones and

damaged the kidneys of 300,000 infants (Branigan, 2008). In 2011, a chemical additive,2-ethylhexyl

phthalate (DEHP), was detected in the products of 47 Taiwan companies of food and drinks, which

could cause some growth problems in children (Galarpe, 2011). In 2011, 150,000 tons of feed for

chickens,turkey, and swine werecontaminated with the cancer-causing additive called dioxin, which

was added by the German company, Harles and Jentzsch (Spiegel Online, 2011).

The above-mentioned food incidents indicate potential problems on regulating the producers’

and manufacturers’ risky behaviors. These problems may include (a) lack of regulations and pun-

ishments in some developing countries, such as China (Ming, 2006); and (b) lack of resources for

the government to enforce regulations (Ellis and Turner, 2010).

Researchers have suggested various forms of the government regulations, for better managing

the (food) supply chain risks. These include (a) the imposition of liability for damages (Segerson,

1999); (b) the joint use of liability and safety regulation (Shavell, 1984); (c) fines and correctivetaxes

(Kambhu, 1990); (d) a higher inspection accuracy and stronger enforcement(Oh, 1995; Cheung and

Zhuang, 2012); (e) transferring safety failure costs from the government to manufacturers (Chen,

2009); and (f) transferring costs and benefits from the government to manufacturers using penalty

contracts (Hobbs and Kerr, 1999). This paper focuses on the government punishment strategies,

while other types of regulation could be studied in future works.

1.2. Adding chemicals/additives in food industry

Figure 1 illustrates a general food industry process, where raw materials are initially raised by

farmers. The food is then transported by the distributors to the manufacturers for processing,

and are eventually sold to and used by the consumers. This paper focuses on the risky behavior

of the manufacturers. During the process, chemical additives could be added by the farmers and

manufacturers. For example, the farmers could use chemicals to irrigate crops, or add hormone

in the fodder to foster animal growth. The manufacturers could use whitening/antistaling/dyeing

agents to better preserve food and enhance appearance. Farmers and manufacturers may overuse

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