Prescriptive Labeling of Food Products: a suitable Policy Instrument?

Prescriptive labels, which include the use of ?traffic light? rankings on food products and energy efficiency classifications on electrical appliances, modify firms? decisions. Thus, a labeling policy that accounts only for consumer responses may not achieve its intended outcome. This study uses a vertical differentiation model in which three firms compete in a market to examine the changes in consumers? quality perceptions caused by prescriptive labeling and to identify how these policies impact market share, prices and welfare. We examine two cases faced by the public regulator. When the regulator wants to reinforce the valorization of the dominant quality attribute, we find that a rewarding labeling strategy yields more weighted quality in the market than a penalizing strategy. Furthermore, a mildly stringent rewarding strategy generates the highest results. In the case where the regulator wants to weaken this quality perception, a penalizing labeling strategy is the best scenario.