Collective Marketing Arrangements for Geographically Differentiated Agricultural Products: Welfare Impacts and Policy Implications

Abstract

This paper examines the incentive of atomistic agricultural producers within a specific geographical region to differentiate and collectively market products. We develop a model that allows us to analyze the market and welfare effects of the main types of real-world producer organizations, using it to derive economic insights regarding the circumstances under which these organizations will evolve, and describing implications of the results obtained in the context of an ongoing debate between the European Union and United States. As the anticipated fixed costs of development and marketing increase and the anticipated size of the market falls, it becomes essential to increase the ability of the producer organization to control supply in order to ensure the coverage of fixed costs. Whenever a collective organization allows a market (with a new product) to exist that otherwise would not have existed there is an increase in societal welfare. Counterintuitively, stronger property right protection for producer organizations may be welfare enhancing even after a differentiated product has been developed. The reason for this somewhat paradoxical result is that legislation aimed at curtailing the market power of producer organizations may induce large technological distortions. AbstractThis paper examines the incentive of atomistic agricultural producers within a specific geographical region to differentiate and collectively market products. We develop a model that allows us to analyze the market and welfare effects of the main types of real-world producer organizations, using it to derive economic insights regarding the circumstances under which these organizations will evolve, and describing implications of the results obtained in the context of an ongoing debate between the European Union and United States. As the anticipated fixed costs of development and marketing increase and the anticipated size of the market falls, it becomes essential to increase the ability of the producer organization to control supply in order to ensure the coverage of fixed costs. Whenever a collective organization allows a market (with a new product) to exist that otherwise would not have existed there is an increase in societal welfare. Counterintuitively, stronger property right protection for producer organizations may be welfare enhancing even after a differentiated product has been developed. The reason for this somewhat paradoxical result is that legislation aimed at curtailing the market power of producer organizations may induce large technological distortions.

Strength of Protection for Geographical Indications: Promotion Incentives and Welfare Effects

“…GI promotion, in this context, attains the "extending reach" function of advertising discussed by Norman, Pepall and Richards (2008). Also, in line with existing literature on GIs (e.g., Zago and Pick 2004;Anania and Nisticó 2004;Lence et al 2007;Moschini, Menapace and Pick 2008), our analysis is based on the assumption that GI products possess some "specific quality" due to their geographical origin, which cannot be replicated elsewhere, and that consumers value this GI attribute relative to generic versions of the product that can be produced elsewhere. Consequently, we model consumer demand in a vertical product differentiation setting.…”

“…But because GI firms share the GI label, the decision of how much to promote is assumed to be made collectively by the producer association representing the GI industry so as to maximize the aggregate industry profit (Lence et al 2007;Moschini, Menapace and Pick 2008).…”

Geographical Indications and the Competitive Provision of Quality in Agricultural Markets

“…In the model of Lence et al (2007) this result arises from the assumption that a fixed cost is required to develop such products (very much as in our setting) and that there are no certification costs per se. Because costless imitation is possible in that context, some degree of supply control may be necessary (depending on the size of the required fixed cost) to encourage producers to develop a geographically differentiated agricultural product.…”

“…The government provides GI certification rights to highquality producers, who are free to decide the size of the club (i.e., who among the highquality producers has access to it). Lence et al (2007) focus on the problem of developing new GIs. The key to developing such products is a fixed cost.…”

Are Minimum Quality Standards Imposed by Federal Marketing Orders Acting as Nontariff Trade Barriers?

“…The assumption of exogenous quality levels is a common and realistic simplification for agricultural products, and may hold literally in instances when quality designations are based upon standards set by government or by the producer organization itself, and buyers utilize those standards as proxies for true quality. Further, because marketing orders predominately regulate observable product characteristics (e.g., cosmetic defects, size, and blemishes) and consistent with the recent literature (Chambers & Pick, 1994;Lence, Marette, Hayes, & Foster, 2007;Saitone & Sexton, 2010), I assume perfect information regarding quality attributes throughout the model. The vertical differentiation model of consumer demand follows the Mussa and Rosen (1978) formulation and most prior work on MQS.…”