Downstream labeling and upstream price competition

Olivier Bonroy and Stéphane Lemarié

European Economic Review, 2012, vol. 56, issue 3, 347-360

Abstract: This paper analyses the economic consequences of labeling in a setting with two vertically related markets. Labeling on the downstream market affects upstream price competition through two effects: a differentiation effect and a ranking effect. The magnitude of these two effects determines who in the supply chain will receive the benefits and who will bear the burden of labeling. For instance, whenever the ranking effect dominates the differentiation effect, the low-quality upstream firm loses from labeling while all downstream actors are individually better off. By decreasing the low-quality input price, the label acts as a subsidy and leads to an increase of the downstream market welfare. This analysis furthers our understanding of the economic consequences of labeling in cases like those of GMOs or restaurants.

Keywords: Label; Imperfect consumer information; Vertical product differentiation; Vertical structure; Innovation (search for similar items in EconPapers)
JEL-codes: L15 L5 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (14)

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Working Paper: Downstream labeling and upstream price competition (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:56:y:2012:i:3:p:347-360

DOI: 10.1016/j.euroecorev.2011.10.003

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