On the Economics of Labels: How Their Introduction Affects the Functioning of Markets and the Welfare of All Participants

Abstract

Are labels good or bad for consumers and firms? The answer may seem straightforward since labels improve information, yet economic theory reveals situations where their introduction reduces the welfare of at least some market participants. This essay reviews the theoretical literature on labels in order to identify and explain the main reasons that may cause labeling to produce undesirable side-effects. In contrast to earlier reviews that either concentrate on narrow topics or treat the subject in a more or less informal way, we bring together the main results from all the currently important topics by presenting and discussing the assumptions and modelbuilding underpinning them. The advantage of this approach is that it identifies the origin of the differences between results, thus allowing the synthesis of results that sometimes appear even to be contradictory. We focus on "quality labels" and examine: i) the impact of labeling on market structure; ii) the side-effects of costly certification; iii) issues related to the label's

Consumer preferences regarding country of origin for multiple meat products

“…5 Thus, we do not explicitly consider research that has a theoretical focus or examines market level welfare implications. For readers interested in a theoretical examination of CoO the recent papers by Roe et al (2014) and Bonroy and Constantatos (2015) provide excellent summaries. For research on market level impacts and resulting welfare implications for consumers and manufacturers from the introduction of mandatory CoO, Awada and Yiannaka (2012), Baltussen et al (2013), Joseph et al (2014) and USDA (2015) offer informative and insightful analysis.…”

Does Organic Wine Taste Better? An Analysis of Experts' Ratings

“…The implicit goal of eco-labels is to prompt informed purchasing choices by environmentally responsible consumers (Leire andThidell 2005: 1062). Unfortunately, even though labeling may alleviate asymmetric information, it may not improve social welfare due to the existence of other market imperfections (Bonroy and Constantatos 2015).…”

Organic vs. Non-Organic Food Products: Credence and Price Competition

“…They study the impacts of perfect labeling providing full information and imperfect labeling providing partial information on the outcome of the competition. A detailed and updated review about the labeling on credence is referred to [33]. Our paper differs from the above studies on labeling of credence goods in that we focus on firms' own credence system of trust, such as building firms' own traceability system and making advertisements.…”