Food Origin Labeling and “Promoting Competition”

This paper analyzes the consumer and producer implications of origin-of-food labeling when the production process is a credence attribute. Since origin-of-food labeling has been discussed by the U.S. government in the context of “promoting competition”, a model is presented that evaluates consumer welfare and producer welfare as a function of labeling standards. The model finds that if there is consumer misperception and the consumers are unaware that labeling does not imply completely domestic production, then consumers are helped with higher standards; but domestic profits may be higher with a more lax standard. If consumers are aware of the average level of domestic production that is implied by the label, then they are indifferent to the standard, while domestic profits are still maximized with a standard that balances a price premium with the costs of domestic production. The model also analyzes possible differences between upstream and downstream producers.