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The Economics of Geographical Indications: GIs Modelled As Club Assets

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Abstract

Geographical Indications (GIs) for products (Basmati rice, Champagne sparkling wine, Antigua coffee, etc.) were regulated at the international level in 1995 (WTO TRIPS Agreement, Part II, Section 3). This paper sets a general framework of analysis for GI-labeled goods, based on the modeling of a GI as a club asset (partial excludability and no rivalry in benefits to the firms that lawfully label their products with the GI). A model of club reputation is developed which includes Shapiro (1982) and Winfree & McCluskey (2005) as special cases. Reputation is assumed to be traceable through the GI label; quality is endogenously determined at the firm level, with reputation as the state variable. In contrast with previous research, it is shown that the TRIPS legal construct around GIs is potentially compatible with an equilibrium involving a self-fulfilling level of quality (and reputation) that is above the minimum, under the condition that the GI club has a reduced membership of firms. However, the establishment of a minimum level of quality is still the first best policy to improve firm profits. It is also shown that under bottom-up firm-driven processes of club formation (maximization of firm profits), firm levels of quality and profits are higher, and levels of club membership are lower, than under top-down State-driven processes (maximization of club profits). When quality is taken as exogenous, the model evolves into a static partial equilibrium framework, where the GI is subject to potential dilution phenomena due to membership crowding and oversupply. GI-related expenses, output, membership, and club finance are all determined simultaneously. It is shown that under partial rivalry in benefits, both output and membership are reduced, in an equilibrium that approaches the cartel equilibrium. State subsidization is shown to lead to potential inefficiencies stemming from price and incentive distortions. The geographical confinement of output is shown to impact factor prices and quantities. Finally, issues concerning potential monopsonistic concerns and the replication of GIs are briefly sketched.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 10-2010.

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Length: 68 pages
Date of creation: 16 Jun 2010
Date of revision:
Handle: RePEc:gii:giihei:heidwp10-2010

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  1. Daniel Pick, 2008. "Geographical Indications and the Competitive Provision of Quality in Agricultural Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 794-812.
  2. Giovannucci, Daniele & Josling, Timothy & Kerr, William & O'Connor, Bernard & Yeung, May T., 2009. "Guide to Geographical Indications: Linking Products and Their Origins (Summary)," MPRA Paper 27955, University Library of Munich, Germany.
  3. Levin Jonathan, 2009. "The Dynamics of Collective Reputation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, August.
  4. Olivier Gergaud & Victor Ginsburgh, 2008. "Natural endowments, production technologies and the quality of wines in Bordeaux. Does terroir matter?," ULB Institutional Repository 2013/99266, ULB -- Universite Libre de Bruxelles.
  5. Pierre Fleckinger, 2007. "Collective Reputation and Market Structure: Regulating the Quality vs Quantity Trade-of," Working Papers hal-00243080, HAL.
  6. Rouviere, Elodie & Soubeyran, Raphael, 2008. "Collective Reputation, Entry and Minimum Safety Standard," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44465, European Association of Agricultural Economists.
  7. Langinier, Corinne & Babcock, Bruce A., 2005. "Producer's choice of certification," 2005 Annual meeting, July 24-27, Providence, RI 19510, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Langinier, Corinne & Babcock, Bruce A., 2006. "Agricultural Production Clubs: Viability and Welfare Implications," Staff General Research Papers 12670, Iowa State University, Department of Economics.
  9. Zago, Angelo M. & Pick, Daniel H., 2004. "Labeling Policies in Food Markets: Private Incentives, Public Intervention, and Welfare Effects," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(01), April.
  10. Landes, William M & Posner, Richard A, 1987. "Trademark Law: An Economic Perspective," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 265-309, October.
  11. John Crespi & Stéphan Marette, 2002. "Generic Advertising and Product Differentiation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(3), pages 691-701.
  12. G¸nter Schamel & Kym Anderson, 2003. "Wine Quality and Varietal, Regional and Winery Reputations: Hedonic Prices for Australia and New Zealand," The Economic Record, The Economic Society of Australia, vol. 79(246), pages 357-369, 09.
  13. Jason A. Winfree & Jill J. McCluskey, 2005. "Collective Reputation and Quality," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 206-213.
  14. Cornes,Richard & Sandler,Todd, 1996. "The Theory of Externalities, Public Goods, and Club Goods," Cambridge Books, Cambridge University Press, number 9780521477185.
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