Marketing Orders, Grading Errors, and Price Discrimination

14 Pages Posted: 31 Mar 2020

See all articles by James A. Chalfant

James A. Chalfant

University of California, Davis - Department of Agricultural and Resource Economics

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

Some marketing orders allow an agricultural industry to regulate the flow of product to market. We examine a more common, but less controversial, aspect of marketing orders, the setting and enforcement of grades, and show that purposefully introducing error into the grading process reduces farmers' incentives to produce high‐quality product, thus partially sustaining the adverse selection problem that would exist in the absence of grades. Because demand for high‐quality product is generally inelastic relative to demand for low‐quality product, grading error can increase industry profit. In principle, an industry can achieve through grading error the same allocation of product between high‐ and low‐quality outlets as attainable through direct volume regulation.

Keywords: adverse selection, grades, grading error, marketing order, price discrimination, prunes, Q110, Q130, Q180

Suggested Citation

Chalfant, James A. and Sexton, Richard J., Marketing Orders, Grading Errors, and Price Discrimination (February 2002). American Journal of Agricultural Economics, Vol. 84, Issue 1, pp. 53-66, 2002, Available at SSRN: https://ssrn.com/abstract=3564614 or http://dx.doi.org/10.1111/1467-8276.00242

James A. Chalfant (Contact Author)

University of California, Davis - Department of Agricultural and Resource Economics ( email )

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Davis, CA 95616
United States
530-752-9028 (Phone)

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
327 Voorhies
Davis, CA 95616
United States
530-752-2219 (Phone)

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