On the Economics of Labels: How Their Introduction Affects the Functioning of Markets and the Welfare of All Participants

21 Pages Posted: 15 Apr 2020

See all articles by Olivier Bonroy

Olivier Bonroy

affiliation not provided to SSRN

Christos Constantatos

University of Macedonia

Date Written: January 2015

Abstract

Are labels good or bad for consumers and firms? The answer may seem straightforward since labels improve information, yet economic theory reveals situations where their introduction reduces the welfare of at least some market participants. This essay reviews the theoretical literature on labels in order to identify and explain the main reasons that may cause labeling to produce undesirable side‐effects. In contrast to earlier reviews that either concentrate on narrow topics or treat the subject in a more or less informal way, we bring together the main results from all the relevant topics by presenting and discussing the assumptions and model‐building techniques that underpin them. The advantage of this approach is that it identifies the origin of the differences between results, thus allowing the synthesis of results that sometimes appear even to be contradictory. We focus on “quality labels” and examine the impact of labeling on market structure, the side‐effects of costly certification, issues related to the label's trustworthiness, the rationale for mandatory vs. voluntary labeling, the level at which the label's standard is set according to the agency that selects it, the political economy of labels, that is, pro‐ or anti‐label lobbying, lobbying to affect the label's standard, and lobbying in favor or against the label's mandatory imposition. These topics cover a wide range of applications, including Genetically Modified Organism (GMOs), organic produce, geographic indicators, controlled origin, eco‐labels, etc. We conclude by identifying topics that require further research.

Keywords: Asymmetric information, certification, credence goods, labeling, market power, political economy, regulation, vertical product differentiation, welfare

Suggested Citation

Bonroy, Olivier and Constantatos, Christos, On the Economics of Labels: How Their Introduction Affects the Functioning of Markets and the Welfare of All Participants (January 2015). American Journal of Agricultural Economics, Vol. 97, Issue 1, pp. 239-259, 2015, Available at SSRN: https://ssrn.com/abstract=3574244 or http://dx.doi.org/10.1093/ajae/aau088

Olivier Bonroy (Contact Author)

affiliation not provided to SSRN

No Address Available

Christos Constantatos

University of Macedonia ( email )

156 Egnatia St.
P.O. 1591
Thessaloniki, 54006
Greece

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