Measuring Food Product Differentiation by Quality Ratings: A Cross-Entropy Analysis of Specialty Coffee e-Auctions

Food quality ratings can be used for product differentiation and strategic marketing. This article develops a differentiation measure based on the cross-entropy of two distributions for speciality coffees. It examines whether quality ratings achieve their objectives for speciality coffee supply chains. The estimation, using e-auctions data, indicates that the quality rating is more informative in the Cup of Excellence (CofE) relative to the Q auction. To determine significance, a statistical test for comparing the information measure across different e-auctions and segments of the quality rating was developed. The significant difference between the two auctions is not a surprise as the auctions trade coffee lots of different volumes and the quality evaluation is more important in the case of the CofE, with its jury of renowned coffee experts. The total cross-entropy measure of product differentiation shows that the 100-point quality rating does not carry the same information content and meaning in the two different e-auctions and their respective supply chains. The cross-entropy measure of product differentiation is shown to be a good indicator of the information and the value created throughout the speciality food supply chain. Copyright (c) 2009 The Authors. Journal compilation (c) 2009 The Agricultural Economics Society.