Implementing COOL: Comparative welfare effects of different labeling schemes

Country-of-origin labeling (COOL) is being implemented in different forms and degrees in the United States and other countries across the world. The first implementation of mandatory country of origin labeling (MCOOL) in the United States was for seafood in 2005. This is an example of partial MCOOL because it exempts the foodservice sector and excludes processed seafood from labeling. Using a conceptual framework, we analyze the welfare impacts of partial MCOOL when compared to no, voluntary, and total mandatory COOL, taking into account imperfect competition in the downstream markets, information asymmetry, and diversion of low-quality product to the unlabeled market. The model is general enough to apply to any incomplete regulation for which the perceived low-quality product is required to be labeled, such as the labeling of genetically modified food in the European Union. Our results show that when consumers have a strong enough preference for domestic relative to imported product, regulators can overestimate the gain in consumer welfare from partial mandatory labeling if they ignore the diversion of lower quality imports to the unlabeled sector. We show that if the preference for domestic product is large enough, total MCOOL benefits the home market the most overall, including domestic consumers and producers, but not the imperfectly competitive downstream agents. However, if total MCOOL is too costly to implement, partial MCOOL is the second-best solution, but only if consumers falsely believe the unlabeled product to be of higher quality than it truly is. Our results suggest more research is needed to determine the extent to which consumers value the information provided by MCOOL and to enable regulators to consider the welfare impact of diversion in evaluating incomplete mandatory labeling regulations.     

Consumer welfare and GM food labeling: A simulation using an adjusted Kumaraswamy distribution

Genetically modified (GM) food products and their labeling have become a major policy issue with impassioned public debates. We explore the impact of different labeling regimes on consumer attitudes towards GM products and consumer welfare. Our experimental results illustrate that these consumer attitudes do not follow the Uniform distribution as has often been assumed in the literature but instead fit an adjusted Kumaraswamy distribution. If a Uniform distribution is assumed, the advantage of mandatory labeling would be exaggerated. Using an adjusted Kumaraswamy distribution our simulation results demonstrate that voluntary labeling is superior to mandatory labeling with the higher separation cost, while mandatory labeling is not necessarily better with lower separation cost. Therefore, the governments of China and other countries with similar consumer characteristics should consider voluntary labeling for GM food while encouraging innovations that reduce the price of GM food as well as controlling the opportunistic behavior of its producers so as to enhance the advantage of voluntary labeling.     

Cursed Consumers and the Effectiveness of Consumer Protection Policies*

We model firms' quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, that is, mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve welfare, they often lead to a reduction in consumer surplus. Our conclusions hold in extensions with endogenous quality and horizontal differentiation.     

The welfare impact of food pathogen vaccines

Vaccines against several common foodborne pathogens are being developed and could substantially alter the policy tools available to address foodborne illness. However, little analysis is available to suggest how social welfare would be affected by consumer and industry responses to these new vaccines. To address this void, we use stated-preference data to estimate consumer willingness to pay (WTP) for food safety vaccines and then simulate the welfare impacts of subsidizing consumer purchases of the vaccine given two different industry responses: maintaining current levels of food safety vigilance and reducing food safety vigilance due to a moral hazard response that undermines consumer confidence in food safety. To obtain consumer preferences for the vaccine, we simultaneously estimate a three-equation model that recognizes the recursive nature of responses to questions probing respondents’ willingness to purchase vaccines and perceptions of the probability and severity of possible foodborne illness incidents and the joint distribution of unobservable components. Our simulations show large consumer WTP if vaccines are relatively inexpensive while the presence of moral hazard increases respondents’ willingness to pay and voluntary uptake of vaccine.     

Market regulation of voluntary add-on contracts

This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making base product choices, but overestimate the value of such warranties at the point of sale. Under retail competition, the consumers’ option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss-leadership. Inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.     

Estimation of the Effects of New Brands on Incumbents’ Profits and Consumer Welfare: The U.S. Processed Cheese Market Case

I estimate the effects of new brands on market competition and consumer welfare in the U.S. processed cheese market. I find that an observed increase in consumer welfare was attributable mainly to an increase in the number of brands in the sample market, while the price effect, which measures welfare change caused by adding new brands to existing brands, decreased welfare as the prices of the existing brands increased in a large portion of sample markets. The price increase was most pronounced among the introducers existing brands. I also find that the data used in the paper identify a significant enhancement of consumer welfare as a result of the change in product characteristics provided by new brands even if a large portion of welfare gain is explained by the assumption on the error term in the utility function.JEL classification: D40, D60, L13, L66, H20     

Resale price maintenance and restrictions on dominant firm and industry-wide adoption

We consider a model in which firms use resale price maintenance (RPM) to dampen competition. We find that even though the motive for using RPM is thus anti-competitive, market forces may limit the overall adverse impact on consumers. Indeed, we find that when there are a large number of firms in the market, consumer welfare under a laissez-faire policy might be as high or almost as high as it would be under an alternative policy in which RPM is banned. Government interventions that put an upper limit on the extent of industry-wide adoption of RPM can have adverse welfare effects in the model. We further show that proposed guidelines in the United States and Europe may come close to minimizing welfare.     

Elasticity of demand and behaviour-based price discrimination

Behaviour-based price discrimination (BBPD) is typically analysed in a framework characterised by perfectly inelastic demand. This paper provides a first assessment of the role of demand elasticity on the profit, consumer and welfare effects of BBPD. We show that the demand expansion effect, that is obviously overlooked by the standard framework with unit demand, plays a relevant role. In comparison to uniform pricing, we show that firms are worse off under BBPD, however, as demand elasticity increases the negative impact of BBPD on profits gets smaller. Despite a possible slight increase in the average prices charged over the two periods in comparison to uniform pricing, we show that BBPD boosts consumer surplus and that this benefit is independent of elasticity. In contrast to the welfare results derived under the unit demand assumption, where BBPD is always bad for welfare, the paper shows that BBPD can be welfare enhancing if demand elasticity is sufficiently high.     

Real-Time Pricing and Imperfect Competition in Electricity Markets*

We analyze the effects of the adoption of real-time pricing (RTP) of electricity when generating firms have market power. We find that an increase in consumers on RTP contracts decreases peak prices and increases off-peak prices, increases consumer surplus (both for switching and non-switching consumers) and welfare, while decreasing industry profits, with these effects being magnified by the extent of market power. We illustrate these results by calibrating our model to the New Zealand electricity market, and find that taking into account the market power of generating firms increases the efficiency gains from RTP adoption by 41%.     

The Welfare Consequences of Mixed Environmental Policy Instruments with Voluntary Provision

This article evaluates the welfare consequences of a mixed regulatory framework with a voluntary cap‐and‐trade program and intensity standards using data from the Texas electricity industry. I construct and estimate a structural model of the compliance choices of power generating units to recover their abatement costs. Then I simulate for the counterfactual equilibrium under a mandatory cap‐and‐trade regulation. Results show that the mixed policy framework mainly benefits generating units with small capacity and high abatement costs. However, a mandatory cap‐and‐trade regulation with redistribution policies could bring in substantial Pareto improvement.     

Demand for farm animal welfare and producer implications: Results from a field experiment in Michigan

This study utilizes a Becker-DeGroot-Marschak (BDM) mechanism to assess Michigan consumer demand for animal welfare practices. Results are examined in the context of changing farm production costs and producer marketing margins. We find that while consumers are willing to pay significant premiums for animal welfare standards, failing to account for the costs associated with producing the entire animal under the new system could lead to suboptimal policy that negatively affects producer welfare. Our results suggest that consumer premiums for animal welfare are product specific and that WTP estimates should not be generalized to the entire animal. We discuss policy implications of our findings and highlight the importance of considering producer costs when evaluating consumer demand for farm animal welfare practices.     

Access regulation and investment in next generation networks — A ranking of regulatory regimes

This paper analyses how different types of access regulation to next generation networks affect investments and consumer welfare. The model consists of an investment stage with uncertain returns and subsequent quantity competition. The access price is a function of investment costs and the regulatory regime. A regime with fully distributed costs or a regulatory holiday induces highest investments, followed by risk-sharing and long run incremental costs regulation. Simulations indicate that risk-sharing creates most consumer welfare, followed by regimes with fully distributed costs, regulatory holiday and long run incremental costs, respectively. Risk-sharing benefits consumers as it combines relatively high ex-ante investment incentives with strong ex-post competitive intensity.     

Evaluating the impact of reforming the food subsidy program in Egypt: A Mixed Demand approach

Food subsidy is one of the policies considered to protect consumer welfare against food price increases, in particular when the insufficient local production has to be complemented by food imports with volatile prices. Egypt has experienced several “food crises” (the latest in 2008), which put an halt to attempts to reform in depth the system of food subsidies because of social unrest. In this paper, we use a Mixed Demand approach to analyze the consumption structure of Egyptian households. Our model specification takes into consideration the characteristics of the Egyptian food subsidy system, where some food items have predetermined quotas while others are associated with predetermined (subsidized) prices. Price, income and quota elasticities are estimated from the Egyptian family expenditure survey, and welfare change measures are derived by income class. Simulations of various options to eliminate subsidies on selected food items are conducted. We estimate the negative welfare impact of the reforms, especially in the context of increasing food prices, by comparing welfare effects of policy options by income quartiles and by household category (rural, urban).     

Who are the producers and consumers? Value chains and food policy effects in the wheat sector in Pakistan

We develop a disaggregated Nominal Rate of Assistance (NRA) methodology to disentangle the welfare impacts of policies for various interest groups along the value chain (to disaggregate effects within the “producer” and “consumer” umbrellas). We apply our value chain NRA methodology to the case of Pakistan’s wheat price and trade policy. We analyze the welfare implications for various agents in the wheat-flour value chain from 2000 to 2013, a period characterized by major global price volatility and by regular adjustments of domestic policies. We find that the wheat policy has generally benefitted flour consumers and wheat traders at the expense of wheat farmers, with limited effects on flour millers. Our findings illustrate that the welfare implications of policies can be quite different within the “producer” and “consumer” umbrellas, which has potentially important implications for economic and political economy analyses and for the design of policies that aim to target the poorest groups along value chains.     

消费信贷对经济发展的影响分析

基于中国2001～2010年的国内生产总值(GDP)、消费信贷余额(CD)、社会消费品零售总额(SST)和狭义货币供给量(M1)的季度数据,本文通过建立VAR模型实证研究了消费信贷对经济增长的影响效应。脉冲响应分析和方差分解的结论显示消费信贷对经济增长有正向拉动影响,但受所占经济总量比重小的限制,目前影响幅度较小,对GDP增长的贡献率也较低。     

Technology adoption, learning spillovers, and the optimal duration of patent-based monopolies

The paper analyses an often overlooked aspect of the patent system, namely, that a monopoly franchise for production of a new good could lead to a second-best welfare optimum event when there was no future prospect of inventions being induced by the patent. It is shown that a paten may improve economic welfare relative to a regime of competitive supply when there are learning externalities or ‘spillovers’ from experience in the process of production. Comparative statics show that stronger learning effects at low levels of experience tend to strengthen the case for ex post grant of a monopoly franchise.     

The impact of mandatory trans fat labeling on product mix and consumer choice: A longitudinal analysis of the U.S. Market for margarine and spreads

The impact of changes in food labeling policy on food consumption depends on how market participants—both firms and consumers—react to the changes across all products in the market. We investigate how both responded to the U.S. Food and Drug Administration’s 2006 rule mandating that the quantity of trans fat in food products be separately labeled on the mandatory Nutrition Facts Panel across an entire differentiated product category. Using a longitudinal data set tracking both product offerings and consumer purchases in the market for margarine and spreads for over a decade, we analyze how product mix and consumer purchase behaviors were influenced by the new regulatory requirement. We find that the number of products bearing voluntary “trans fat free” labels increased after the labeling regulation was implemented. However, a large number of the newly introduced products exited the market within five years. As a result, the FDA’s 2006 rule had a stronger short-run than long-run effect on product offerings. Even after the introduction of additional “trans fat free” labeled products, such products remained only a small percentage of margarine and spreads product offerings, increasing from a pre-regulation level of 2.3% of the market to a peak of 6.5% in 2007 before dropping to 3.1% by 2011. In addition to firm response, we examine demand-side reactions to the 2006 rule and find that consumers significantly increased their expenditures on “trans fat free” labeled products soon after the labeling changes were implemented, increasing from about 1.2% of the market in 2001 to a peak of 5.9% in 2007, before returning to 1.8% in 2011. We further explore variations in responses across different demographic characteristics. Although long-run effects are small, the market for “trans fat free” labeled margarine and spreads settled into a new equilibrium with a somewhat higher level of products in the market than prior to the 2006 rule taking effect and a somewhat higher share of expenditures in the category. Overall, our category-wide analysis of both firm and consumer behavior indicates that the effects of the labeling policy change were smaller in the longer run in this market than would be indicated by an analysis of only new product introductions in response to the policy change.     

A preliminary comparison of the retail level effects of genetically modified food labelling policies in Canada and France

Most developed countries have adopted labelling policies for genetically modified (GM) food. In April 2004, Canada implemented a voluntary labelling policy for GM and non-GM food, while France adopted the European Union’s new extended mandatory labelling of GM food. I present the result of a qualitative survey of GM and non-GM food labels in supermarkets in Canada and France, five months after the introduction of the new policies. I find that there are almost no GM labelled products in France and non-GM labelled products in Canada. Each policy tends to crowd out the targeted label attribute. However, Canadian consumers can choose between GM and non-GM organic products, whereas there are only non-GM products in French supermarkets. Recent political developments in Quebec suggest that the labelling landscape may change in Canada, either with an increase in the number of non-GM products at the retail level or a transition towards a mandatory labelling policy like in France.     

Location and competition in retail banking

We investigate the impact of banking deregulation during the 1990s on consumer welfare. We estimate a spatial model of consumer demand for retail bank deposits that explicitly accounts for consumer disutility from distance traveled. This is important given the substantial changes in banks' branch networks observed in the data. Our model indicates that cross-price elasticities between banks whose branches are close to consumers (‘close’ banks) are larger than those between ‘far’ banks and more than double the cross-price elasticity of ‘close’ banks with respect to ‘far’ banks. We distinguish between thrifts and other banks and find that within-thrift competitive effects are stronger than within-bank effects or those between thrifts and banks. We use our estimates to predict the effect of changes in market structure on consumer welfare following the branching deregulation of the Riegle–Neal Act of 1994. Our results indicate that the median household gained around $60 per year from the changes. Approximately two thirds of the gains come from within-market changes in market structure. The gains were greater in markets with high initial numbers of banks than elsewhere.     

The implementation mechanisms of voluntary food safety systems

The recent food scares have been the motivation for voluntary programmes on food safety being promoted by public authorities and voluntarily implemented by food operators. In this article, we take into account the nature of the contamination risk to investigate the complementarities between private and public mechanisms for those voluntary systems to be implemented by a firm. We show two main results. First, when the firm directly markets its products to consumers a strong mandatory threat is a sufficient condition to implement voluntary systems whatever the risk of contamination. In contrast, when the mandatory threat is weak voluntary systems should be more implemented in industries where the risk of food contamination is low (pesticide residue) than in industries where the risk of contamination is high (pathogenic contamination). Second, when the risk of food contamination is low and the firm is embedded in a supply chain where the retailer can impose its own safety system, a well-designed penalty contract will induce a voluntary implementation whatever the mandatory threat.