Determine the factors that have significant affects on choosing clean vegetables of consumers in ho chi minh city

In case the sample survey at market or clean vegetables shop, it is difficult to get the high quality information.. Its difficulty to distinguish and estimate the quality of vegetables,

VIETNAM - THE NETIIEQLANDS PQOJEcr FOQ M.A IN DEVELOPMENT ECONOMICS

DETERMINE THE FACTORS THAT HAVE SIGNIFICANT AFFECTS

ON CHOOSING CLEAN VEGETABLES OF CONSUMERS

IN HO CHI MINH CITY

BY NGUYEN VAN DU

BQ GIAO C<.<-~ · , , TRUONG fJH K!~m ·: ,_

THY u ·f VI-£:'N .i\.~1

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY JULY 2007

VIETNAM - Tim NEMRLANDS PROJECT FOR M.A ON DEVELOPMENT ECONOMICS

DETERMINE THE FACTORS THAT HAVE SIGNIFICANT AFFECTS

ON CHOOSING CLEAN VEGETABLES OF CONSUMERS

IN HO CHI MINH CITY

BY NGUYEN VAN DU

THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Supervisor: Dr.NGUYEN NGOC HOA

HO CHI MINH CITY JULY 2007

ACKNOWLEDGEMENTS

I would like to thank more than those respectable name that I will mention following Without them, I can not get knowledge as today and this thesis may not even have existed First, I would like to express my special thanks to all organizations and member those found this programme All lectures and staff of the project help me having useful lessons, interesting seminars and new information

Next, I wish to express sincere appreciation to my academic supervisor Dr Nguyen Ngoc Hoa for his helpful guidance and assistance during the writing of this thesis I also deeply thank to Dr Nguyen Trong Hoai, Dr Le Cong Tru, Dr Nguyen Hoang Bao, Mr.Thuy, Mr.Vu for their valuable suggestion and ideals about earlier draft of this thesis Following, I send my thanks to Libran, Ms.Chi, who helps help me in finding necessary document and reference books Thank to Board of Managers of Co-Op Mark supermarket channel helping me in survey consumers Thank to Mr.Dung, agriculture chief, Agricultural and Rural Development Office of Ho Chi Minh City who provides data for this thesis Many thanks go to my classmate, who shared with me joys and hardness during the time I study in this program

My thanks send to my family, my parents, my wife who help me in supporting time, money and belief Share my joyful with my daughter who helps me understood the meaning of happiness and life

Topic title: Determine the factors that have significant affects on choosing clean

vegetables of consumers in Ho Chi Minh City

ABSTRACTS

According to International Labor Organization, yearly in the world, there are around

40000 in 2000000 who got vegetables poisoning were killed and the loss in economic is

so big1 Vegetables poisoning is one of the big problems in many countries because it does not only give direct effect but also give the indirect effect to health and economy in future Using vegetables that have contaminants at levels well above maximum residue limits, including pesticides, nitrate and heavy metals can get some kind of disease; even it

is the reasons of some kinds of cancer in future2 However, in Ho Chi Minh City (HCMC) and other provinces in Vietnam, the percentage of clean vegetables are used is limited

So, in this thesis, I hope to answer the questions that which factors affecting the choice of clean vegetables of consumers in HCMC In addition, I hopefully give out some recommends to farmers, producers, and retailers in order to raise clean vegetables demand For the benefit of using clean vegetables, my thesis aim to build process that contributes to the successful propaganda of using clean vegetables My theses may become reference document to run clean vegetable programme of the government or the other organizations

1

Nguyen Sa- vnexpress.net 16/04/2005

TABLE OF CONTAINS

CHAPTER I: INTRODUCTION

1.1 Problem statement 2

1.1.1 The food poisoning picture in recently years 2

1.1.2 The product, harvesting and distribution ofvegetables 2

1.1.3 Clean vegetables demand 4

1.1.4 The role of government and consciousness of citizens 4

1.2 Research objectives 5

1.3 Research questions and hypothesis 6

1.4 Methodology 6

1.5 Scope and limitation of research 7

1.6 Structure ofthe study 8

CHAPTER 2: THEORETICAL FRAMEWORKS 2.1 Supply and demand curve 11

2.1.1 Supply and demand concepts 11

2.1.2 Elas~icity of supply and demand ···:··· 13

2.2 Theory of consumer's choice 15

2.2.1 Consumer preferences 15

2.2.2 Budget constraints 17

2.2.2.1 Budget line 17

2.2.2.2 The effict of price 18

2.2.2.3 The effict of income 19

2.2.3 Consumer choice 20

2.3 Markets with Asymmetric Information 22

2.3.1 Asymmetric Information and adverse selection 23

2.3.2 Market signalling 24

2.3.3 Brand name 24

2.3.4 The value of information 25

2.3.5 The principal- agent problem 26

2.4 Distribution channel 26

2.4.1 The rule of distribution channels to the development of market 27

2.4.2 The structure of distribution channel 28

2.5 Empirical studies 29

2.6 Suggested research model 31

2.7 Chapter remarks 32

CHAPTER 3: AN OVERVIEW OF CLEAN VEGETABLES IN HCM CITY 3.1 The characteristic of HCM city 35

3.2 An overview of vegetable production in HCM city 36

3.3 The policies of HCM city government about clean vegetable 39

3.4 Distribution and management vegetable in circulation 40

3.5 Chapter remark 43

CHAPTER4: ECONOMETRIC ANALYSIS AND RESULTS 4.1 Model specification 44

4.1.1 Model selection 44

4.1.2 Model specification 46

4.1.3 Analytical framework .' 48

4.2 Data description 52

4.3 Descriptive statistics 5.2 4.4 Result of estimations 54

4.4.1 Model test 54

4.4.2 Result of regression 55

4.4.3 Comment on results 55

4.5 Chapter remarks 57

CHAPTER V: CONCLUSION AND POLICY RECOMMENDATIONS 5.1 Conclusion 59

5.1.1 Conclusion basing on result regression 59

5.2 Policy recommendations 61

5.2.1 The consumer policy recommendations 61

5.2.2 The policy recommendations 62

5.2.2.1 Policy recommendations for producers 62

5.2.2.2 Policy recommendation for distributors 63

5.2.2.3 Policy recommendation for government and manage 64

5.3 Limited of thesis and suggestion for further studies 64

Appendix 66

Questionnaire 68

Reference 71

LIST OF TABLES

Table 3.1: Statistic sheet about vegetables in HCM since 2002 to 2006 36

Table 3.2: The vegetable area developing plan from 2005 to 2010 39

Table 3.3 Method name and time for testing vegetables quality 41

Table 4.1: Summary of chosen variables and expected signs 48

Table 4.2: Customer point of view about price of clean vegetables 53

Table 4.3: Distinguishing able of customers about clean vegetables 53

Table 4.4: Believed of consumers in brand name 53

Table 4.5: Clean vegetable distribution process 53

Table 4.6: Parking and information requirement ofvegetables 54

Table 4.7: Estimated probability changed of variables 55

LIST OF FIGURES AND PICTURE

Figure 2.1: Supply and demand 12

Figure 2.2: New Equilibrium following shifts in Supply and Demand 13

Figure 2.3: An Indifference Curve 16

Figure 2.4: A Budget line 18

Figure 2.5: Effect of change in price on the budget line 19

Figure 2.6: Effect of change in income on the budget line 20

Figure 2.7: Maximizing consumer satisfactions 21

Figure 2.8: The popular consumers' good distribution channels 28

Picture 2.1: Farmer sense is low in using chemical 3 8 Picture 2.2: Farmer maintain pesticide in wrong way 3 8 Figure 4.1 : Logit an probit cumulative distributions 46

Good Agricultural Practice

Knowledge

Income

Brand name

Distribution

Food and Agriculture Organization

World Health Organization

United State Dollar (American Currency) VietNam Dong (Vietnamese Currency)

CHAPTER I

INTRODUCTION

The first chapter is used to introduce and to give the main summary of this thesis First of all, I will give out the existences of safe food, general speaking, and clean vegetables privacy in section 1.1-Problem statements Safe food becomes serious problems when the number of food poisoning is increasing and for vegetables, the insecticide residuum in vegetables is still in high level Under economist and management views, there are many reasons that lead to this situation such as production processing, distribution processing and the role of management organization From the fact of safe food, many consumers must change their favourite food because of safe reason Even some consumers choose foreign food in our agricultural economic

The reason why I choose this thesis is due to the problem statement and especially the antilog when the producers say superabundance while the consumers say deficiency

In section 1.2-Research objects include both general objective and specific objective The main objective of this study is to identify the factors that have significant effects on chosen clean vegetables of consumers and thus affecting demand of the whole market Basing on the finding result and combining with the main objective, I also supply the relevant information to producers, distrib~tors, managers or some organizations

In section 1.3-Research question and hypothesis, I will give out the questions and hypothesis that come form my observations and relative theories Those questions and hypothesis will help me determine how the factors affect on choosing clean vegetables Next, I would test to illustrate whether the hypotheses are right or wrong?

I also mention methodology in section 1.4 where I discuss model specification, the variables, data and the method that are used to test the hypothesis

The last section, 1.5 is structure of the study where I will describe the structure of this thesis I provide you with the chapter title and the summary of the information of those chapters

1.1 Problem statement

In this part, I will give out the food poisoning picture in recently years including food poisoning, the processing of procedure, business and reactive of customers I also mention on the clean vegetables demand curve, the roles of government and reactions of consumers

1.1.1 The food poisoning picture in recently years

Food poisoning becomes serious and frequent to the health of citizens Many organizations have given out warning and the laws are issued in order to control poisoned food However, in recently years, the number of poisoned food increases yearly According to annual statistics of HCM committee, during 2004, there were 18 cases and

1803 people were poisoned In 2005, the number of poisoning case increased by 27 cases and 1771 people were poisoned in which four people died (HCM General Statistic Office, 2006) There are many kinds of food poisoning such as foodstuff poisoning, drink poisoning, vegetables poisoning, etc , but in this thesis I just mention the reasons that concern vegetables

The vegetables poisoning is difficult to control because vegetables is a kind of food that is used every day We knew that vegetables are major component of Vietnamese diets Moreover, with its characteristic, vegetables wou"ld be quickly distributed and used

So we suffer the serious result in case vegetables are sold on market but still contain unhealthful elements It is difficult for consumers to distinguish the quality ofvegetables, especially the chemical residuum that is used to kill insects or to maintain after harvest That is the reason why some articles said that consumers must change or give up the vegetables they like because of safe reason This is the reason that leads to the Vietnamese meals which are becoming unbalances (Lam Vu, 2006)

1.1.2 The product, harvesting and distribution ofvegetables

The production processing, collection and retail contain many problems Firstly, production that is small, manual and lack of synchrony leads to low productivity and more pestilent insect With the limited size of their plots, usually less than 500m2

vegetables growers use large quantities of fertilizer and pesticide in the expectation of high yields (MOUSTIER, 2000) When the consciousness of farmers is low and the production processing is not controlled, the vegetables quality is sold on the market would have problems Using pesticides is an example, the custom of Vietnamese farmers in using chemicals to kill pestilent insect and use in common jobs are reasons that lead to low quality product According to Trade Deputy Minister Phan The Rue in 2006, chemicals and additives that cost 1.2 million USD are imported and used to produce and

to maintain food, vegetables, etc On vnexpress.net 26/7/2006, True Ngon, the

V nexpress reporter, describes that: the number of the farmers who go to pump insecticide

is as crowded and cheerful as go to the fair everyday They open the packs of chemicals, throw the packs to the drainage naturally, then pump chemicals over the vegetables until the fields become as dark as the thin dew and the smell of insecticide makes your eye and your throat become pungent He also pointed out that there were some kinds of insecticides that are banned to use as "Thasodant", but the farmers still use widely He said that this pesticide is so obnoxious that with only small quantity can kill all fish in the pond The consequence is that the level exceeds maximum residue limits, including pesticides, nitrates and heavy metals If compared with the standards of Codex Alimentarius that F AO and WHO, the residue Cypermethrin (Sherpa) is 6 times higher meanwhile Carbendazim is 3 times higher than permitted level Especially for some vegetables that still contain Thasodant at the high level It makes the experts surprised when customers have used these vegetables to cook or even eat without cooking (True Ngon, 2006)

The harvest and distribution also have problems According to deputy director Science and Technology for Agriculture and Rural Development (Nguyen Kim Vu, 2006),

we need to keep vegetables in good condition after harvesting in order to raise the good value in circulation However, it is necessary to perform in right process, in right chemical and right dosage In case these are done in wrong process, consumers can get food allergy, the digestion diseases, soft poison or even these are the reasons that lead to acute poison or some kinds of cancer because toxin have been accumulated and kept in

liver for a long time The other problems are business in vegetables Usually, from producing to consuming will run as following:

1.1.3 Clean vegetables demand

We are living in the developing country with over 80 millions people; therefore, the demand of vegetables is increasing Moreover, the demand to balance nutrition is necessary Usually, everyone needs 300 gram per day (Vu Lam, 2006) so with more than

80 billions citizens, our vegetables demand is so great The fact shows that the percentage

of the children adiposity is increasing, and of course the number of people who need to have diet is increasing, too However, the quality of vegetables becomes the warning to them This leads to the fact we have agricultural economy, but we must import vegetables and the consumers have used vegetables at the lower necessary level Some hotels and schools must use vegetables that are imported from foreign countries (Bich Thanh, 2005)

1.1.4 The role of government and consciousness of citizens

How about the role of the government in managing clean vegetables? There are many deeds referring to clean vegetables such as conferences, propaganda posters and policies that are enforced in order to control our vegetables market However, at the

Minister Agricultural and Rural Development, Bui Ba Bong said that there were not enough majored force and test method to control safe food programs Moreover, some ideas said that those policies are run in an irregular way For example, to answer the question who is responsible for managing the quality of vegetables in the market; Health

of Ministry, Agricultural and Rural Development of Ministry or Trade of Ministry? In conferences, the delegates said that we need to make clear own responsibility in managing and distributing vegetables

The sense and the knowledge of citizens about the affect of vegetables are low This causes difficulty to run clean vegetables program It is supposed that consumers have well understood about the affect of vegetables or they know about the worse quality of vegetables which they choose, they will change their option They may be willing to pay high price for clean vegetables and make them having a right position in the market The characteristic of unclean vegetables does not affect directly, so consumers shouldn't be subjective If consumers use unclean vegetables for a long time, it will lead to serious diseases

From those above problems, I think it is necessary to do the research and find out the characters that affect to clean vegetables market I hope my thesis will supply the information to producers, businessmen, organizations and consumers in order to improve clean vegetables market

1.2 Research objectives

Also from those above problems, my main objective of this thesis is to determine the factors that have significant effects on choosing clean vegetables of consumers and thus affecting the demand of clean vegetables in the HCM city as well as the whole Vietnam market Those specific objectives are:

1 To supply relevant information to the producers, distributors and clean vegetables program of government

2 To find out which groups of consumers have a trend to choose clean vegetables, well knowledge or high income people Base on this result, we may have better plan in order to improve clean vegetable statement

1.3 Research questions and hypothesis

The thesis focuses on answering the main question "What are the key factors effected to clean vegetables choices of consumers?" Those may include price, income,

brand name, and asymmetric information of clean vegetables So the thesis will answer the following questions

1 How does the knowledge of consumers about clean vegetables affect to choose clean vegetables of consumers?

2 Does the brand name of companies that produce clean vegetables affect clean vegetables demand?

3 Does the asymmetric information give the effect to clean vegetables demand?

4 How does the income and price affect to choose the clean vegetables?

5 How does the distribution system affect to choose clean vegetables?

Based on the research questions, I would like to answer all of these questions only

in the scope of my thesis For some problems such as income of consumers, price of clean vegetable are improved in many researches, so my hypothesis will concentrate following problems:

1 If the companies include production and distribution with their brand name, create believed for consumers then consumers will choose clean vegetables more

2 If the consumers have perfect information about vegetables quality and the bad affected of unclean vegetables, they will choose clean vegetables more

3 If the companies provide convenient distribution channel then the clean vegetables demand will be expand

1.4 Methodology

From the problem statements and my objectives, the methodology used in this thesis

is the descriptive statistics and running an econometric model to test the hypothesis First, the descriptive statistic method is used to describe the relevant data base Next, an econometric model is estimated to examine the relationship between chosen, dependent variable, and independent variables such as income, knowledge, price, etc Software

"Eview" is use to run regression and test hypothesis

Data for this thesis are mainly from consumers' survey and it is data-cross sectional The other sources come from Statistic Offices, the information on website and the reports

of Agriculture and Rural Development Office, Health Department There are some data limits such as number and quality of samples In my survey data is divided into three groups that are in traditional market, household and clean vegetables shop In case the sample survey at market or clean vegetables shop, it is difficult to get the high quality information

1.5 Scope and limitation of research

Place to choose in research is HCM City because it is the biggest city in Vietnam with crowded residents The demand of clean vegetables and other goods is so great Moreover, output vegetables of HCM City can not supply enough all the demand of vegetables in HCM So the big amount must import from other provinces That means more difficult in management and the effect would so great when a poising happen Those are some reasons why clean vegetables market is complicated on both policies and operations However, one of limited of this thesis is HCM City does not represent for Vietnam because some factors such as seasons, income, education, etc

The objective to do research is the behavior of consumers In the research, I am trying to find out how does the relationship between prices, education and brand name affect demand curve? However, this thesis is not mentioned to supply process so we cannot show the whole picture of demand and supply of clean vegetables

The thesis also has some other limited when I use the survey data and the supplies sources of vegetables market are difficult to control The amount of samples is also the limited

The limitation also comes when I do not mention to the other affect of clean vegetables demand such as price index, inflation, import and export, substitution and complement goods

1.6 Structure of the study

Following chapter I, the thesis will be continue with 4 following chapters:

Chapter 2: Theoretical frameworks: On the second chapter, I will talk about theoretical frameworks that are relevant to the demand curve of goods in general and in clean vegetables I also mention to the factors that affect to supply and demand The preference of consumers is discuss in this chapter, the economist explain consumer's behaviour and some other factors that affect to the choice of consumers The clean vegetables contain asymmetric information and distribution problems Its difficulty to distinguish and estimate the quality of vegetables, so clean vegetables market has close relationship with asymmetric information, brand name and distribution In this chapter, I also mention and inherit the result of previous empirical studies

Chapter 3: An overview of clean vegetables in HCM City: This chapter is used to·

describe the overview and of clean vegetables in HCM City With HCM city' own characteristic such as crowded citizens, great demand, the outstanding of demand, etc, HCM City must face to many difficulties So in this chapter, I will give out policies of HCM committee and the existing of management on clean vegetables I also analyse the relevant statistic number and relevant information of clean vegetables in HCM

Chapter 4: Empirical analysis: In this chapter provides a methodology of the research At first, in the model specification selection, I will select a model After that I give out analytical framework and show the reasons that I choice model Then in data descriptive, I show out how data is collected and I show out the limited of data The next sections, descriptive statistic, I will analyse data and find out the relationship of data And

the last section, estimate model, I will base on collected data and run the regression to test the hypothesis statistics and result of estimation The chapter remark is the last section

Chapter 5: Conclusion and recommendations: Base on the result of thesis, I give out the conclusion, recommendations and suggestion for further studies

CHAPTER II

THEORETICAL FRAMEWORKS

This chapter is used to mention to the basic theories to build up this thesis The thesis's objective is to find out the significant factors that have effect on the choice of clean vegetable of consumers At first, I will mention the theory of supply and demand curve in section 2.1 The theory of supply and demand will show the demand of consumers about clean vegetable and explain how demand is affected by supply process Then as we know, all the selections of consumers are not only explained in supply and demand theory but also in the other theories We know that the own consumer preference

is different to another one For example, I'd like food meanwhile the other would like clothes or services The different is similar in financial, it isn't true when the consumers want something then they can purchase those goods because they have the limitation of budget line Most of consumers have to face to the lack of finance so in their fmancial condition, how do they decide to choose goods that they need? Those problems will be mentioned in section 2.2, theory of consumer's choice Section 2.3 is the problems that have relevant to asymmetric information Most of the commercial transactions are affected by the balance of information between buyers and sellers They hardly have the same infqrmation about one business so they will have differeut evaluation in the value of goods The asymmetric information may lead to the adverse selection and step by step it drives the high quality good out of market The next one, section 2.4 will be distribution channels: There have been some researches that prove the market is affected by distribution Especially in foods, the distribution channel gives the convenient and incentive to consumers much more After that, I will mention empirical studies in section 2.5 that I have already to read and inherited the results of previous researches After that, I combine both theory and empirical study in order to give out the suggested model in section 2.6 The chapter remark is used in order to summarize on the last section 2.7

2.1 Supply and demand curve

Supply and demand concepts are not only mentioned in business but also in many other fields Economists use those concepts to explain and forecast about economic situation in the world By analysing supply and demand curve, we may partly understand the mechanic of market In this section, I will build the supply and demand curve and then give out some concepts such as equilibrium point of market, surplus, shortage problem, etc The factors shift the demand and supply curve to the left or the right and how we can predict new price, new quantity when the supply and demand shift? Beside that, I also mention to the elasticity of supply and demand

2.1.1 Supply and demand concepts

The supply curve shows that how much quantity the producers will sell each price level At lower price, the producers will supply less and on the contrary, at the higher price, the producers want to supply more So the supply curve will be upward sloping The demand curve shows that how much the quantity that the buyers want to purchase corresponding to the price level The buyers will buy more at the lower price and on the contrary, at the higher price, the buyers will buy less So the demand curve will

be downward sloping

Suppose other factors are unchanged, the law of demand curve will be: "when price increases, the quantity will decrease and when price decreases, the quantity will increase." Demand - supply curve will intersect to each other at the balance point between price and quantity It is the market equilibrium where supply and demand are equal

In free market, the price will keep on change until reach to the equilibrium point At the lower price, the goods will be shortage status because the buyers want to buy more meanwhile the sellers are not be willing to supply at that price level On the contrary, at the higher price, the goods will surplus Figure 2.1 describes those problems

Figure 2.1: Supply and demand

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :23) The market clears at price P0 and quantity Q0 At the higher price P1, a surplus

develops, so price falls At the lower price P2, there is a shortage, so price is bid up

We know that the world economy is affected by many different factors According to Pindyck and Rubinfeld (200 1 ), there are many factors that affect to supply and demand curve, for example, the quantity that the producers want to sell not only depends on price but also depends on the input cost such as salary, interest rate, and the price of input material Similarly, beside price factor, the demand curve depends on income, price of other goods, tax and many other fac~ors When those factors give the effect to the economic then demand and supply will change and then price, quantity change afterward This leads to the equilibrium change in order to touch new equilibrium point

In most market both demand and supply shift time to time Beside those factors that

I have already mentioned above, there are many other reasons such as seasons, taste and government's policy Economist uses supply and demand curve to trace the effect of those changes In case the affection of those factors shifts supply and demand curve to the right then price and output may usually increase On the contrary, the supply and demand shifts

to the left, price and output may decrease The special case happens when both supply and demand shift at one ratio, the output will change but price will not or there are some special cases when one change and the other do not or one curve shifts left and the other shifts right so on In general, the changing of price and output depend both on how much

the supply and demand curve shift and the shapes or the slope of those curves To predict the sizes and directions of such changes, according to Pindyck and Rubinfeld (2001 ), we must be able to characterize quantitatively the dependence of supply and demand on price and other variables

Summary, the rules of moving supply and demand as figure 2.2 describes: when input cost such as materials, salary, etc decrease then supply curve will shift to the right and on contrary, supply curve will shift to the left For demand curve, in case of consumer's increases, some consumers will spend more; the demand will be expanded and shifted to the right

Price

s

,- S'

Quantity

Figure 2.2: New Equilibrium following shifts in Supply and Demand

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :26)

Supply and demand curves shift over time as market conditions change In this

example, rightward shifts to the supply and demand curves lead to a slightly higher

price and much larger quality In general, change in price and quality depend on the

amount by which each curve shifts and the shape of each curve

2.1.2 Elasticity of supply and demand

As I mentioned above, the demand and supply for a good depends not only on its price, but also on consumer income, on the price of other goods, on the inputs cost, etc However, one question that most the economists want to know is the quantity supply or demand will rise or fall when they are affected by other factors? And how sensitive is the

demand when its price increases or decreases? Those problems are explained by elasticity concept According to Pindyck and Rubinfeld (2001), "elasticity is percentage change in one variable resulting from a 1 percent increase in another'' "Elasticity measures the sensitivity of one variable to another Specifically, it is a number that tells us the percentage change that will occur in one variable in response to a !-percent increase in another variable" For price elasticity of demand is example, percentage change in quantity demanded of a good resulting from a !-percent increase in its price is described like that:

Ep = (%6Q)/ (%6P) Where %6Q means "percentage in Q" and %6P means "percentage in P" The percentage change in the variable is just the absolute change in the variable divided by the original level of price Thus we the price elasticity of demand can write as follow

If the price elasticity is less than 1 in magnitude, demand is said to be price inelastic" However in market, there are only some special cases that can not be explained by the price elasticity of demand such as infinitely elastic demand, completely inelastic demand and income elasticity of demand, so on It happens in case the market is affected

by some factors such as monopoly or the market with the intervention of government

We can not explain all the market mechanism by supply and demand theories In fact, when consumers choose this or that, it is not only depending on price but depending

on others factors such as consumer's preference and the limitation about budget line In the next part, I will mention to those problems

2.2 Theory of consumer's choice

I already mentioned to the rule of supply and demand in section 2.1 In that section I give out some factors that affect to supply and demand curve such as price, income, input cost, etc However in the market there are many other factors affect to supply and demand curve for example consumer preferences, the limitation of budget line, the changing of price or income, etc So in this part, I will mention some factors that give the effect to the consumer's choice This is an important part when we study about behaviours of consumers

2.2.1 Consumer preferences

According to Pindyck and Rubinfeld (2001), the best way to study about the consumer preferences is comparative the good basket in the market The good basket is some goods such as food, clothing, fuel that are the needed of consumers They can arrange and rank the market basket and then made the comparative between those baskets before choosing To make the order, Pindyck and Rubinfeld give out three basic assumptions about the consumers prefer this to that and those assumption hold for most people in most situation

The first assumption is the completeness This means preferences are assumed to be complete or the other understandings are consumers can compare and ·rank all possible baskets So for any two baskets A and B, a consumer will prefer A to B, prefer B to A or that consumer will be equally satisfied with either basket In this assumption, we just mention to preference but not price because one consumer may like some goods but they

do not choose because they have limitation on the budget line or other understanding they haven't got enough money

The second assumption is that the preferences are transitive If a consumer prefers basket A to basket B and prefers basket B to basket C then that consumer will prefer basket A to basket C

The third assumption is much is better than less Suppose that the goods have the same quality except some special case when good give the harmful to consumers such as pollution, sickness, and consumers have the trend prefer more to less

From three basic assumptions above, we give out the concept of indifference curve According to Pindyck and Rubinfeld, "An indifference curve represents all combinations

of market baskets that provide a consumer with the same level of satisfaction That person

is therefore indifferent among the market baskets represented by the points graphed on the curve"

With the three previous assumptions, we know that a consumer can indicate either a preference for one market basket over another or indifference between the two So we can rank all the possible consumption choice We make clearer by drawing the figure in that

we suppose that there are two kinds of goods - clothes and food We use vertical axis measures the number of unit clothing and the horizontal axis measures the number of units of food In this diagram, all market baskets describe combinations of food and clothing that consumer wish to consume fu point A shows that market basket is the combine of 20 units of food and 30 units of clothing Similarly, market basket G is the

combine of 20 units clothing and 10 units of foods Base on the assumption more that less,

the consumer prefer A to G and consumer also prefer E to A etc However, the consumers can not make the compare from the market basket A, B, D because at that market basket the consumer has the same preference

Clothing (units per week)

The indifference curve U1 that passes through market basket A shows all baskets that give the consumer the same level of satisfaction as does market basket A; these include baskets B and D Our consumer prefers basket E, which lies below Ur

So, the indifference curve U 1 that passes through point A, B, D indicates that the consumers are indifferent among these three market baskets It means that when consumers change from point A to B or to C, they do not fell better or worse off

2.2.2 Budget constraints

We are discussing on consumer theory and in prevwus we have seen how indifference curves can be used to describe how consumers value various baskets of goods However, indifference curve can not explain all the behaviour of consumers because the consumers must face to the lack of budget, or in consumer theory, we call the budget constraints The budget line limits the preference of consumers when they give up the market basket that the consumers prefer to the market basket that they choose

2.2.2.1 Budget line

We know that most of consumers may not enough money to buy all the good that they wanted According to Pindyck and Rubinfeld (2001 ), "the budget line indicates all combinations of goods for which the total amount of money spent is equal to income" So the combinations of goods that the consumers can buy will all line on the budget line I suppose that consumers use their money to buy clothing and food then we have equation like that:

PpF+PcC =I (2.1)

Where I means income of consumers, Pp, Pc is price of food and price of clothing, F

is amount of food and C is amount of clothing A, B, D, E, G is combinations points of goods In this case is clothing and food

Using equation (2.1), suppose that income I is unchanged, now to see how much of

C must be given up to consume more ofF We divide both sides of the equation by P c

It is the equation for a straight line; it has a vertical intercept of liP c and a slope

of-(Pp!Pc) Those are described in figure 2.4

Clothing units per week

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :76)

A budget line describes the combinations of goods that can purchase given the

consumer's income and the price of goods

When we look at the equation 2.2, the slope of the budget line, -(Pp/Pc), is the negative of the ratio of the prices of the two goods The magnitude of the slope tells us the rate at which the two goods can be substituted for each other without changing the total mcome

2.2.2.2 The effect of price

In the market, the price is usually changed What happen to the budget line if the price of one good changes but the price of the other does not or price of one good changed much more than the others? One it happens, the slope of budget line will changed and then the consumers will have new budget line The case price of both goods change at the same ratio then the budget line will be unchanged We give the supposition that price of food decrease 50%, in that case, the vertical intercept to the budget line remams unchanged although the slope changes The opposite case when the price of food increases double then the budget line will rotation inward, ~have sloped -Pp/Pc is equal

to 1 New diagram, fmger 2.5 is used to describe this situation

In the figure 2.5 we have new budget line L2 by rotating the original budget line Ll outward, pivoting from the C-intercept In new budget, we fmd that the consumer who just consumes clothing only and no food is unaffected by this price change How ever for the consumers who consume food will experience an increase in their purchasing power

On the other hand when price of food double, the budget line rotates inward to line L3 because the person' purchasing power has diminished

Clothing

units per week

0

Food units per week

Figure 2.5: Effect of change in price on the budget line

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :78)

A change in the price of one good (with income unchanged) causes the budget line to rotate about one intercept

In the case price of both clothing and food raise or fall at the same ratio then the budget line will shift parallel outward or inward

2.2.2.3 The effect of income

In case the income of consumers change, higher or lower, then the budget line will have the same slope but the intersection of budget line to vertical and horizontal axis will change The new budget line will parallel with the original one, expand to the left in the case income decrease and to the right on the contrary

Clothing units per week

units per week

Figure 2.6: Effect of change in income on the budget line

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :77)

A change in income causes the budget line to shift parallel to the original line L1 When

the line income increases, the budget line shifts outward to Lz If the income falls, the

line shifts inward to L3

2.2.3 Consumer choice

After given preferences and budget line, I will mention to how do every t4e consumers choose goods and how much they choose for every good? Of course their selection must give maximize the satisfaction they can achieve, given the limited budget available to them

To maximize the satisfaction, it must satisfy two conditions Firstly, it must be location on the budget line It is easy to understand that problem because as we suppose in the previous part, the consumers just consume two kinds of good - clothing and food So

in case the market basket to the left of and below the budget line leaves some incomes unallocated and then satisfy consumers will fall (In fact, most of consumers still done that for example they must spend on many things or save but to be simple, we suppose that there are just only two kinds of good) So consumers will not choose that market basket because they do not want to lose their satisfying In the other way, the consumers

can not touch the market basket that location to the right of and above because they have limited budget line So their choice must location on the budget line

The secondly, their choice must give them the most preferred combination of good and services These two conditions give out the problem of maximizing consumer satisfaction to one of picking an appropriate point on the budget line

It must give the consumer the most preferred combination of goods and services

We look at the example one time, with two kinds of good - clothing and food and

we give out three points in that are the combination of food and clothing A, B, C as be illustrate in figure 2.7

The three indifference curves describe the consumer's preferences for food and clothing We fmd the curve U 1, that point B located, gives the least satisfaction then the curve U 2, the point A located, is middle and the curve U3 gives greatest amount of satisfaction

(Units per week

FIGURE 2.7 Maximizing consumer satisfactions

(Source: Robert S.Pindyck and Daniel L.Rubinfeld:80)

On the figure, we find that point B that locates on indifference curve U1 and on the budget line is not give the most preferred choice On that market basket, we know that the consumers spent more on clothing and less on food Other choice, more on food and less

on clothing will increase the consumer's satisfaction By moving to point A, locate on the indifference curve U2, with the same amount of money is spending but money but they increase level of satisfaction The case point C, locate on the indifference curve U3, to the left of and outward of budget line, give the most satisfaction but the consumers can not purchased with the available income Therefore, A maximizes the consumer's satisfaction

So we find that the market basket that maximizes satisfaction must line on the highest indifference curve that touches the budget line In the figure above, point A is the point of tangency between indifferent curve U2 and the budget line At point A, the slope of the budget line is exactly equal to the slope of the indifference curve Because MRS -Marginal Rate of Substitution- (-.1.C/.1.F) is the negative of the slope of the indifference curve, we can say that satisfaction is maximized

MRS= Pp!Pc

We have an importance result: Satisfaction is maximized when the marginal rate of substitution (ofF and C) is equal to the ratio of the prices (ofF to C) So the consumers can get maximum satisfaction by adjusting his consumption of goods F and C so that the MRS equals the price ratio

2.3 Markets with Asymmetric Information

For theories that I has mentioned above, I had already suppose that both sellers and buyers have the same information about the quality of good However, according to Begg ( 1991 ), Pindyck and Rubinfeld (200 1 ), the asymmetric information is the characteristic of many businesses Usually, the sellers have more information about their quantity than the buyers and this problem has effect to the market In this part, I will discussion how asymmetric information drives out the high quality product from market - lemons problem - and adverse selection problem To solve lemons problem, people must build

market signalling and brand name by supplying the quality to potential buyers In some

case of business, the principal- agent problems happen that be mention in the last part

2.3.1 Asymmetric Information and adverse selection

Information asymmetries between buyers and sellers can result in market failure (Akerlof, 1970) Under view of Pindyck and Rubinfeld (2001 :596) "Asymmetric information is the situation in which a buyer and a seller possess different information about a transaction" Suppose two kinds of good are available - high quality and low quality Of course for high quality, the input cost must be higher so its cost must be higher than the other one The seller knows clearly about his good because he is himself products this good but the buyers do not In case the buyers can not distinguish the quality

of two goods, they do not willing to pay high price for high quality product They have trend to choose the good that have lower price Step by step, the high quality will be drive out of market

So, asymmetric information can be result in market failure, therefore the potential buyers for high quality will fall In an ideal world of fully functioning market, consumers would be able to choose between low-quality and high-quality Then there are some consumers who choose low-quality because of low price meanwhile the other willing to pay high price for high quality goods But in fact, in most market, it isn't happen

Asymmetric information leads to adverse selection According to Pindyck and Rubinfeld (2001 :598) "Adverse selection arises when products of different qualities are sold at a single price because buyers or sellers are not sufficiently informed to determine the true quality at the time of purchase As a result, too much of low quality product and too little of high-quality product are sold in the marketplace"

According to Begg ( 1991): "Adverse selection occurs when individuals use their inside information to accept or reject a contract Those who accept are not average sample

of the population" Most of consumption said that, they have can not distinguish the inside quality of production adverse selection

2.3.2 Market signalling

In order to keep the high quality have standing in the market, government and producers give out some methods that help the buyers can distinguish high quality and low quality As I mention above, when buyers can not distinguish about quality of good, buyers may assume that quality is low, so that price falls and only low-quality goods are sold - market fault will happen According to Pindyck and Rubinfeld (200 1 ), market signalling is process by which sellers send signals to buyers conveying information about product quality

In the market, there are many kinds of business that need to use market signalling

We look at employment example When the employer employs the workers, he may not know clearly about worker ability He can not employ many people then sacks employers because if he does that, it costs and in some countries, it can not execute So the employer must base on signal such as education, experiment or interview about the field of the firms

The other way to create good signal to market is guarantees and warranties Since the buyers can not distinguish about a product that they want to purchase, many firm use guarantees and warranties system in order to assert about their product quality Guarantees and warranties system i& usually use for high quality because for low qualitY product, low price, firms will not offer extensive warranties Thus, the buyers may look at extensive warranties as a signal of high quality and they are willing to pay for high price Certification is the other way to assert about their products In some market, the firms base on standard of the functional organization to produce productions The functional organizations used model test, new technology in order to test quality of goods Because the consumers can not distinguish quality by their eyes so they base on certification to choice

2.3.3 Brand name

The American Marketing Association have defined about brand name: "A brand name is a name, term, sign, symbol, design or a combination of them, intended to identify the goods ·or services of one seller or group of sellers and to differentiate them from those

of competitors" For consumers, brand name helps them having more or less understanding about quality of product that they have intention buying

In some most case, the firms use brand name in order to assert their product Brand name is certification that firms must build and keep for themselves According to Duong Huu Hanh (2005), Brand name creates confidence and loyalty of consumers with productions That is assets of firms because firms may reduce in marketing cost, distribute their product in initiative way and attract new consumers Brand name contributes to stock value of firms in finance market Price of product or service of firms with famous brand name is higher than the others Beside that, brand name helps in attracting talents, attracting investors and delaying market share or getting benefit from franchising

Because of features ofbrand name, so firms need to build and kept their brand name

by quality and prestige After having brand name, firms should register to protect their brand name

2.3.4 The value of information

When consumers choice this or that goods, they may face to problem of choice under uncertainly, especially the case of products that consumers can not distinguish the quality of product To reduce risk, consumers may base on insurance when they pay risk premium Risk premium is the maximum amount' of money that a risk-averse person will pay to avoid tasking a risk (Pindyck and Rubinfeld, 2001) However, in some case those have relationship consumer's health such as food, drink, consumers need to reducing risk for themselves One ofway to do that is "obtaining more information"

As I mention above, consumers often make decisions base on limited information If more information were available, one could make better predictions and reduce risk The value of complete information is the difference between the expected value of a choice when there is complete information and the expected value when information is incomplete

2.3.5 The principal - agent problem

In economy market and the globalization trend, specialization, most firms need collaborators to do own functions For example, the firms produce productions and they usually calculate agents, distribution channel to distribute their productions In case the buyers have not got information to distinguish good quality, the agents and collaborators have the importance role in introduction quality of productions According to Pindyck and Rubinfeld (200 1) agent is individual employed by a principal to achieve the principal's objective, meanwhile principal is individual who employs one or more agents to achieve

an objective Principal- agent problem happens when managers (agents) purse their own goals even when doing so entails lower profits for a firm's owner's (principals)

An agency relationship exits whenever there is an arrangement in which the welfare

of one person depends on what another person does The principal -agent problem is that managers may pursue their own goals, event at the cost of obtaining lower profits for owners The questions are raise: In case of incomplete information and the high costly monitoring, how does it affect the way agent act? What mechanisms can give mangers the incentives to operate in the owner's interest? Those are the central questions of any principal- agent analysis Usually, the principals build the contracts that encourage the agents in order to improve their power and keep firm's prestige

2.4 Distribution channel

One of the effectives to consume of customers is distribution channels (Dinh Van Thanh, 2004) In globalization and professionalize context, the distribution channels give strong affects to demand of products For some kinds of goods that not belong to durable good, usually goods that are transacted many times per day or per week such as fresh food

or using daily goods Distribution channels give strong effect to demand of that product Distribution channels solve basic contradictions on market economy that are contradiction between big amount output and retail consumption, contradiction about place of produce and consumption and contradiction about time Suppose that the output of firm is so big and there are no distribution channels, how do the firms sell all their produces? How do

the firm distribute produces to consumers meanwhile every individual demand is small, not concentration, etc Beside that, there are many other problems such as time, store, and capital problems, so on In this part, I will mention to the rule of distribution channels and show out how necessary of distribution on consume produces then I will give out some kind of existing distribution channels

2.4.1 The rule of distribution channels to the development of market

As I mention above, the biggest rule of distribution channels is solve the basic contradictions of market economy First off all, I give out those contradictions and show how distribution channels solve those problems According to Dinh Van Thanh (2004) and his co-workers in "Development distribution channel in Vietnam" book, those contradictions are understood as following:

The first contradiction is big output produce and retail consumption Being professionalizing in produce in order to reduce cost and price of products, most firms give out to the market the great amount of their production However, the characteristic of consume is retail consumption The distribution channels solve this problem by building wholesale, retail nets in order to serve every consumer

The second contradiction is the difference about produce and consumption place Usually, production is concentrated in one place meanwhile the consumption· is widely distribution We need the combined of distribution channel in order to create the amount big enough in transportation The produces are present in every where depend on distribution channels

The third contradiction is the difference about produce and consumption time Since

we can not produce on time consumption demand so we need the stores in order to keep produce and serve consumers on time The distribution channels create good flow that helps produce are circulation

With the three contradictions above, distribution channel helps the firms serve widely, supply their produce timely with suitable price Beside that, with own function such as storage function, transportation function, information supplying function, distribution channel helps firms serve consumers better and raise their competition

2.4.2 The structure of distribution channel

According to Nguyen Van Minh (2006) and Dinh Van Thanh (2004), the productions from factories come to consumers can describe as 2 1 0 diagram

In channel system A, It is the directness distribution when the producers sell to the last consumers There are many kinds of goods are sold by this method and this channel system is suitable for easy failure good, complex good or the good has high value such as airplane, ship, etc When we look at this channel, we find that the firms must run all function of distributor and the consumers use products with the real quality In channel system B or first distribution channel comes when the retailers are strong enough then they can keep good with big amount from the producers Begin this channel to C, D, some time, being profit, the retailers have opportunity to mix the lower quality goods channel

so the principal and agent problem happen

For most kinds of good, the direction distribution from producers to consumers is not feasible For example, the farmers can not distribute their product to consumers because of many reasons With low value produce, the amount of produces farmer is usually so great and they must face with the three contradictions above

Agency

Figure 2.8: The popular consumers' good distribution channels

(Sonrc.e: Dinh Van Thanh 2004:24)

For those theory that I mention above, I thing the factors that have significant affects

on choosing clean vegetables of consumers in Ho Chi Minh City may include: price of

clean vegetable and price of other goods, income of consumers, consumer preferences, distribution channel, product's information, brand name of manufactures and principal-agent problem In case of vegetable and some other goods that consumers can not distinguish about quality of product, the principal - agent problem understands as prestige

Love (1991), an agricultural economist, in research: The national "5 day"

educational program- mentioned about rule of propaganda to consume clean vegetable

This program began in early 1991 as an effort to continue a program sponsored by the National Cancel Institute and California's Department of Health Services with the ambitious goal of doubling demand of clean vegetables that were marking dietary health claims associated with high fibres, low cholesterol, low fat and high vitamin A and C This research showed that since 1970, every 1 percent change in price changed demand only 0.08 percent, while every 1 percent change in income correlated with a 0.75 percent shift in demand So, price is much less affected than income of consumer However, when the consumers were provided awareness of vegetables' beneficial health effect, demand for clean vegetables would be expanded much more even without higher income or lower prices The limited of this research was just based on some kind of vegetables, not all kind