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Welfare Effects Of Eco-Label Proliferation: Too Much Of A Good Thing?

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  • Lohr, Luanne

Abstract

Given that existing food eco-labels are still not well defined in consumers' experience, there is potential for new labels to generate more confusion. Consumers incur fixed costs to learn about a label's meaning. Market shares for existing certifications may be eroded by perceptions that new products are good substitutes for them. The eco-label certifier must respond with information that reduces these costs or lose consumer and producer confidence in the label. Using a model of spatial competition in attribute space, the effect of search costs and educational expenditures on market share and price for competing certifiers is simulated. The results show that educational spending and/or improvements in efficiency of educational spending increase market share when consumer search costs are positive. Underspending on consumer education reduces the price a firm is able to charge within its market niche. The consumer and producer surplus effects of new certifier entry are calculated using a simulation model of market segmentation. Under the assumptions made, segmentation reduces producer surplus while keeping consumer surplus about the same. Market prices decline due to associated search costs as share is captured from the conventional segment by eco-labels. Within segments, consumers gain at the expense of producers, even if market share is maintained by existing eco-labelers after entry of new labels, and even if consumer search costs decline.

Suggested Citation

  • Lohr, Luanne, 1998. "Welfare Effects Of Eco-Label Proliferation: Too Much Of A Good Thing?," Faculty Series 16642, University of Georgia, Department of Agricultural and Applied Economics.
  • Handle: RePEc:ags:ugeofs:16642
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    File URL: http://purl.umn.edu/16642
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    References listed on IDEAS

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    1. Loren W. Tauer, 1994. "The value of segmenting the milk market into bST-Produced and Non-bST-Produced milk," Agribusiness, John Wiley & Sons, Ltd., vol. 10(1), pages 3-12.
    2. Park, Timothy A. & Florkowski, Wojciech J., 1999. "Demand and Quality Uncertainty in Pecan Purchasing Decisions," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(01), pages 29-39, April.
    3. Beath,John & Katsoulacos,Yannis, 1991. "The Economic Theory of Product Differentiation," Cambridge Books, Cambridge University Press, number 9780521335263, May.
    4. Landon, Stuart & Smith, Constance, 1997. "The Use of Quality and Reputation Indicators by Consumers: The Case of Bordeaux Wine," MPRA Paper 9283, University Library of Munich, Germany.
    5. Bruce L. Benson & Merle D. Faminow, 1985. "An Alternative View of Pricing in Retail Food Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(2), pages 296-306.
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    Cited by:

    1. Conner, David S. & Christy, Ralph D., 2004. "The Organic Label: How To Reconcile Its Meaning With Consumer Preferences," Journal of Food Distribution Research, Food Distribution Research Society, vol. 35(01), March.
    2. Wesley Nimon & John C. Beghin, 1999. "Eco-Labels and International Trade in Textiles," Food and Agricultural Policy Research Institute (FAPRI) Publications 99-wp221, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
    3. Stephan Marette & Roxanne Clemens & Bruce Babcock, 2008. "Recent international and regulatory decisions about geographical indications," Agribusiness, John Wiley & Sons, Ltd., vol. 24(4), pages 453-472.
    4. Wang, Qingbin & Sun, Junjie, 2003. "Consumer Preference And Demand For Organic Food: Evidence From A Vermont Survey," 2003 Annual meeting, July 27-30, Montreal, Canada 22080, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Crespi, John M. & Marette, Stephan, 2003. "Some Economic Implications Of Public Labeling," Journal of Food Distribution Research, Food Distribution Research Society, vol. 34(03), November.
    6. Dobbs, Thomas L. & Nguyen, Genevieve & Bertramsen, Sherry K. & Legagneux, Bruno, 2003. "French Quality And Eco-Labeling Schemes: Do They Also Benefit The Environment?," 2003 Annual meeting, July 27-30, Montreal, Canada 22145, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Lohr, Luanne, 2001. "Factors Affecting International Demand And Trade In Organic Food Products," Faculty Series 16674, University of Georgia, Department of Agricultural and Applied Economics.
    8. Lohr, Luanne & Krissoff, Barry, 2001. "Consumer Effects Of Harmonizing International Standards For Trade In Organic Foods," Faculty Series 16726, University of Georgia, Department of Agricultural and Applied Economics.

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