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Private and Public Strategies and the Performance of Food Markets Along the Supply Chain

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Principal Investigator/Project Leader: 
Co-Principal Investigator/Co-Project Leader: 
Department of Project: 
Department of Resource Economics
Project Description: 

A key aspect of food markets are their vertical structures: products move along supply chains from manufacturers (or farmers) to wholesalers to retailers or food service operators to consumers. Interactions among firms in these chains give rise to a variety of economic issues that are no less important than those studied in horizontal interaction (i.e. firms competing for the same end consumer), yet previous work has tended to focus on the latter. This project takes a theoretical and empirical approach to study how several aspects of the supply chain affect the decisions of consumer and firms and their well-being. The first is the issue of buyer market power, as opposed to the extensively studied issue of seller market power. We will build theoretical models aimed at improving our understanding of how welfare is affected when a large buyer, such as Wal-Mart, is present in the market.

Specifically, the project will study the effects of buyer market power on the profitability of firms along the supply chain (farmers, processors/manufacturers, retailers, and exporting and importing firms) and on consumer welfare. We propose to examine the effect of changes in the market factors that include: a) product differentiation and competing behavior by processors, b) the entry of a large chain with buyer power, and c) the elimination of State Trading Enterprises (STEs). The second issue deals with the vertical structure of markets: some markets exhibit a vertically integrated structure (e.g. manufacturing and distribution are owned by the same firm), whereas others exhibit complex agreements (vertical restraints - e.g. exclusive dealing) between players in the supply chain. Theoretically, there are pros and cons for either organizational structure; we offer empirical evidence to illuminate this debate. Specifically we will study the welfare and competitive effects of vertical integration (VI) -- with respect to vertical separation -- and of vertical restraints (VR) -- with respect to the no-vertical-restraints case. The third issue deals with the benefits and costs associated with mandated labeling of food products; we analyze whether legislation for mandated labeling creates effects that are different than the intended consequences.

The objective of this project is to determine the welfare effects of the partial coverage of the Country of Origin Labeling (COOL) legislation for seafood and the quantitative effects of the COOL law on shrimp trade between the United States and shrimp exporting countries. We will use a wide spectrum of methods that range from conceptual models to data analyses of specific industries. This project has primary significance for public policy for a number of reasons. Our proposed work on buyer market power is currently of particular interest given the increased scrutiny on the positive versus negative effects that large retail chains (such as Wal-Mart) may have on society. In addition, our research on VI and VR will inform antitrust policy makers in ways that prior empirical research has not been able to. Similarly, our COOL project will provide quantitative measures of the potential unintended consequences of information regulation.