Quality Choice, Competition and Vertical Relationship in a Market of Protected Designation of Origin

Posted by D. Daniel Sokol

Zohra Bouamra-Mechemache and Jianyu Yu, Toulouse School of Economics (Gremaq, INRA) address Quality Choice, Competition and Vertical Relationship in a Market of Protected Designation of Origin.

We show that the farmers' choice of quality may differ from the processors' choice, de- pending on the demand and technology characteristics of the Protected Designations of Origin (PDO) product. In particular, farmers will prefer a higher quality standard than processors under two conditions. First, the demand for the PDO product should be inelastic enough such that the oligopoly power will lead to a higher price for a small decrease in quantity. Second, when the agricultural input technology exhibits decreasing return to scale, an increase in quality should generate a further reduction in farmers' return to scale, such that a higher quality can be sustained by a higher procurement price while the oligopsonistic processors cannot easily adjust their quantity. We also show that when farmers and processors have conflicting incentive in the choice of PDO quality standard, the equilibrium quality standard is the result from the negotiation between farmers and processors and depends on the relative bargaining power of farmers when negotiating with firms.