Downstream labeling and upstream price competition

This paper analyses the economic consequences of labeling in a setting with two vertically related markets. Labeling on the downstream market affects upstream price competition through two effects: a differentiation effect and a ranking effect. The magnitude of these two effects determines who in the supply chain will receive the benefits and who will bear the burden of labeling. For instance, whenever the ranking effect dominates the differentiation effect, the low-quality upstream firm loses from labeling while all downstream actors are individually better off. By decreasing the low-quality input price, the label acts as a subsidy and leads to an increase of the downstream market welfare. This analysis furthers our understanding of the economic consequences of labeling in cases like those of GMOs or restaurants.

► We model a supply chain with an upstream duopoly market and a competitive downstream market. ► We focus on the effect of a label improving the consumers' information on the use of innovative inputs. ► The innovative input is considered as low quality by the final consumers. ► Label affects the price competition through a differentiation effect and a ranking effect. ► When the ranking effect predominates, the upstream low-quality firm is the only actor worse off.