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Market and welfare effects of mandatory country-of-origin labeling in the U.S. specialty crops sector: an application to fresh market apples.

Do the benefits outweigh the costs, or vice versa?

This is no time for exaggeration or hysteria, but for reasoned and careful analysis.

Board of Directors, United Fresh Fruit & Vegetable Association (2003)

1. Introduction

Public Law 107-171 of the U.S. Farm Security and Rural Investment Act of 2002 required country-of-origin labeling (COOL) for beef, lamb, pork, fish, perishable agricultural commodities (fresh and frozen fruits and vegetables), and peanuts. While the stated goal of this law is to benefit domestic consumers by allowing them to make informed consumption decisions, the effects of COOL on the interest groups involved have been the subject of a heated ongoing debate.

Advocates of COOL (1) argue that there exists an "overwhelming" consumer support for country-of-origin information and benefits that substantially outweigh the costs of this labeling regime (VanSickle et al. 2003). Opposing groups (2) have responded by pointing out that if COOL was beneficial, the market would have provided it voluntarily (3) (Golan et al. 2001; American Frozen Food Institute 2003; Produce Marketing Association 2003; American Meat Institute 2004; Krissoff et al. 2004). Opposing groups have also expressed concerns about the potential competitive disadvantage that non-integrated producers might face as a result of higher record-keeping costs (4) (Food Marketing Institute 2003; National Pork Producers Council 2003), as well as about the possibility of COOL being interpreted as a non-tariff barrier to trade at the World Trade Organization (WTO) (Crummett 2002; Carter and Zwane 2003; Rude, Iqbal, and Brewin 2006). This reaction to COOL resulted in the implementation of the interim rules for all covered commodities (except for fish and shellfish) being delayed until September 30, 2008 (Public Law 108-199; Public Law 109-97).

Public Law 110-246 of the 2008 Farm Bill (aka Food, Conservation, and Energy Act) modified provisions regarding record-keeping requirements, considerations for labeling products of multiple origins, and penalties for noncompliance, and it added goat meat, chicken, macadamia nuts, pecans, and ginseng to the commodities covered by mandatory COOL (MCOOL). The final rules to the policy implementation were published in January 2009 and took effect on March 16, 2009 (USDA 2009). (5)

The enactment of COOL did little to end the debate about the policy, however. Concerned about the trade impact of COOL, Canada and Mexico presented formal challenges of the legality of COOL within the WTO in December 2008. A WTO dispute settlement panel was established in November 2009, and it is expected to report on the consistency of COOL with the WTO trade obligations of the United States by the fall of 2011.

In addition to being scrutinized by the WTO and the interest groups involved, MCOOL has received considerable attention in the agricultural economics literature, with the main focus being on estimating consumers' willingness to pay for labeled products (Schupp and Gillespie 2001; Loureiro and Umberger 2003, 2005; Umberger et al. 2003a, b; Wimberley et al. 2003; Mabiso et al. 2005) and, to a lesser extent, the costs associated with its implementation (Food Marketing Institute 2001; Davis 2003; Hayes and Meyer 2003; Sparks Companies Inc. 2003). Despite the understanding that the implementation of MCOOL will affect both the demand and supply sides of the regulated markets, only a few studies (Grief and Kohl 2003; Plain and Grimes 2003; VanSickle et al. 2003; Brester, Marsh, and Atwood 2004; Krissoff et al. 2004; Lusk and Anderson 2004; Schmitz, Moss, and Schmitz 2005) have focused on analyzing the system-wide economic effects of the policy.

Using a computable general equilibrium model to analyze the effects of MCOOL on all covered commodities but peanuts, macadamia nuts, and pecans, the Agricultural Marketing Service of the U.S. Department of Agriculture (USDA) projected that MCOOL will have a negative impact on both consumer welfare and the domestic production and exports of covered commodities (Federal Register 2009). Two limiting assumptions of the Agricultural Marketing Service study are that the retail sector is perfectly competitive and that MCOOL has no effect on domestic consumer demand for (labeled) U.S.-grown products.

While the potential demand effects of MCOOL are explicitly considered by Grier and Kohl (2003), Plain and Grimes (2003), VanSickle et al. (2003), Brester, Marsh, and Atwood (2004), Lusk and Anderson (2004), Schmitz, Moss, and Schmitz (2005), and Awada and Yiannaka (2009), none of these studies accounts for imperfect competition among retailers. In addition, all of these studies focus on the potential market effects of MCOOL on the meat industry. Despite the fact that 23.1% of all covered fruits, 16.6% of all covered vegetables, and 9.1% of all covered peanuts are of foreign origin (GAO 2003, p. 19), there is, to our knowledge, no systematic analysis of the system-wide effects of MCOOL on these crops.

The objective of this article is to develop a general, theory-consistent methodological framework and to systematically analyze the market and welfare effects of the implementation of MCOOL for specialty crops. Our framework accounts for both the demand and supply effects of MCOOL discussed earlier as well as for their ramifications for equilibrium prices, domestic production, trade, and the welfare of the interest groups involved.

In analyzing the market and welfare effects of MCOOL for specialty crops, a distinct feature of this study is that it explicitly accounts for differences in consumer preferences for domestic and imported products, differences in agricultural producer efficiency, and retailer market power when buying and selling these products. Consumer and producer heterogeneity are key components of our model and are critical to understanding the co-existence of products with different attributes under a mandatory labeling regime (Fulton and Giannakas 2004). Finally, our study complements the applied-theoretic framework of heterogeneous consumers and producers with empirical econometric and simulation analysis for the U.S. market of fresh apples.

The rest of the article is organized as follows. Section 2 provides some background information on the MCOOL regulation for specialty crops. In section 3, the pre- and post-MCOOL equilibria are derived and compared to determine the market and welfare effects of the MCOOL regulation. In section 4, the theoretical model is calibrated with U.S. data on apples and simulated on different values of the key parameters affecting the economic effects of MCOOL. Section 5 summarizes and concludes the study.

2. MCOOL

For fruits, vegetables, ginseng, and nuts to bear a label indicating exclusive U.S. origin, the products must be harvested in the United States. A product is of multiple-country origin (including the United States) when it consists of covered commodities of the same type that are from raw material sources having different origins. Covered commodities of foreign origin shall have the origin as declared by U.S. Customs and Border Protection.

To convey the country-of-origin information, retailers must use a label, stamp, mark, placard, or other clear and visible sign on the covered commodity or on the package, display, holding unit, or bin containing the commodity at the final point of sale to consumers (Federal Register 2003, p. 61946). Bulk containers may contain covered commodities from multiple origins and must be labeled accordingly (USDA 2009). All suppliers of a covered commodity to retailers (i.e., growers, distributors, handlers, packers, etc.) are required to keep records for one year. Retailers must maintain records for as long as the product is on hand. For pre-labeled products (i.e., covered commodities that already have information on their country of origin on the products themselves, on the package in which they are sold to consumers, or on the master shipping containers), their label itself is sufficient for establishing the product's origin (Federal Register 2009). (6,7)

Interestingly, not all sellers of the regulated products are required to inform consumers about the country of origin of these products. In particular, grocery stores with an annual invoice value of less than $230,000 for fruits and vegetables, as well as food service establishments (such as restaurants, food stands, and delicatessens and salad bars within retail stores), are excluded from MCOOL requirements. Also excluded from MCOOL requirements are covered commodities that are ingredients in a processed food item (Federal Register 2003, p. 61947).

In analyzing the market and welfare effects of MCOOL, our study focuses on covered agricultural commodities (ACs) affected by MCOOL (i.e., products that were not labeled prior to the introduction of MCOOL and are sold through retail establishments that buy fruits and vegetables for at least $230,000 per year). The estimated share of agricultural production sold through retailers (supermarkets, warehouse clubs, and superstores) covered by MCOOL is 47% (Federal Register 2009, p. 2686).

3. The Theoretical Model

Our analysis focuses on the decisions and welfare of consumers, producers, and retailers of products affected by MCOOL. Retailers face a demand for AC from consumers that is satisfied with domestic and imported AC. Since origin information is a credence attribute, in the absence of labeling, both types of products are traded together as a non-labeled good. After MCOOL introduction, retailers must inform consumers about the origin of the AC, allowing them to distinguish between domestic and imported ACs. However, the implementation of, and compliance with, MCOOL requirements generates additional costs throughout the supply chain. These costs include the cost of segregation and identity preservation, the cost of labeling, and the costs of monitoring and enforcing the MCOOL regime (Federal Register 2003, 2009). The allocation of these costs to the interest groups involved depends, of course, on the market structure and the elasticities of the relevant demand and supply schedules.

It is important to point out that the ramifications from the introduction of MCOOL cannot be fully analyzed with the conventional supply-and-demand model for two separate markets (those for domestic and imported products), since in the pre-MCOOL situation there is only one demand for the unlabeled product, while in the post-MCOOL scenario there are two demand schedules, one for the imported and one for the domestic product. The methodological framework developed in this article provides a theoretically consistent structural model with which to fully analyze the system-wide effects of the change in the labeling regime.

In the remainder of this section, the behavior of heterogeneous consumers, heterogeneous producers, and retailers with potential market power when buying and/or selling the AC are analyzed first, followed by the derivation of the market equilibria before and after the introduction of MCOOL. The market and welfare effects of MCOOL are obtained, then, through a comparison of these pre- and post-MCOOL equilibria.

Pre-MCOOL

Consumer Behavior

Prior to the MCOOL introduction, domestic and imported ACs are marketed together as a non-labeled good. Consumers in our model have the choice among the following: consuming a unit of the covered AC under study (e.g., apples), consuming a unit of a substitute product (e.g., bananas), or not consuming any of the two products. Consumers differ in the utility they derive from the consumption of the AC and the substitute. Let r, r [member of] [0, R], be the attribute that differentiates consumers with greater values of r corresponding to reduced utility associated with the consumption of these products. The consumer with differentiating characteristic r has the following utility function: (8)

[U.sub.NL] = U - [THETA]r - [p.sub.NL] if a unit of the non-labeled AC is consumed;

[U.sub.s] = U - [tau]r [p.sub.s] if a unit of a substitute product is consumed; and

[U.sub.x] = 0 if none of the two products is consumed. (1)

The parameter U represents a constant per-unit base level of utility derived from the consumption of the AC and the substitute product; [THETA] and [tau] are nonnegative utility discount factors associated with the consumption of the AC and the substitute product, respectively; and [P.sub.NL] and [p.sub.s] are the consumer prices for the non-labeled AC and the substitute, respectively. Since [U.sub.NL] and [U.sub.s] capture the difference between the consumer valuation and the price of the AC and the substitute, they are a direct measure of the consumer surplus associated with the consumption of the two products.

[FIGURE 1 OMITTED]

The consumer with differentiating characteristic [r.sub.NL], where [r.sub.NL]:[U.sub.NL] = [U.sub.s], is indifferent between consuming a unit of the non-labeled AC and a unit of the substitute product, while the consumer with [r.sub.o]: [U.sub.NL] = [U.sub.x] is indifferent between consuming a unit of the non-labeled AC and not consuming any of the two products (see Figure 1). Consumers with differentiating characteristic r [member of] [0, [r.sub.nL]) prefer the substitute product, and consumers with differentiating characteristic r [member of] ([r.sub.NL], [r.sub.o]) prefer the non-labeled AC, while consumers with differentiating characteristic r [member of] ([r.sub.o], R] do not participate in this market. Assuming consumers are uniformly distributed with respect to r, (9) the demand for unlabeled AC, [XD.sup.D.sub.NL], is

[x.sup.D.sub.NL] = [r.sub.0] - [R.sub.NL] = U/[THETA]) - [tau][p.sub.NL]/([THETA]([tau] - [THETA])) + [p.sub.s]/([tau] - [THETA]). (2)

The inverse demand for the unlabeled AC is then

[p.sub.NL] ([X.sup.D.sub.NL]) = [U([tau] - [THETA]) + [p.sub.s][THETA] - [x.sup.D.sub.NL][THETA]([tau] - [THETA])/[tau]. (3)

Aggregate consumer welfare, [W.sup.C], is given by the area under the effective utility curve shown by the upper envelope (dashed line) in Figure 1 and equals

[W.sup.C] = [(U - [p.sub.NL]).sup.2] / (2[THETA] + [([p.sub.NL] + [p.sub.s]).sup.2]/[2([tau] - [THETA])]. (4)

Producer Behavior

Domestic producers choose whether to produce a unit of the AC or a unit of an alternative crop. Producers differ in the net returns they receive from the production of these crops as a result of differences in the agronomic characteristics of the land used in production, their management skills, the adopted technology, etc. Let a, a [member of] [0, [bar.A]], be the parameter that captures producer heterogeneity. Producers are ordered according to their net returns from the production of the AC, from the most efficient producer (a = 0) to the least efficient one (a = [bar.A]). The net returns function of the producer with differentiating attribute a is

[[pi].sub.US] = [p.sup.f.sub.US] - ([w.sub.US] + [delta]a) if a unit of the AC is produced and

[[pi].sub.o] = [[pi].sub.f.sub.o] - [w.sub.o] if a unit of an alternative crop is produced, (5)

where [p.sup.f.sub.US] and [p.sup.f.sub.o] are the farm prices of the AC and the alternative crop, respectively, and [w.sub.US] and [w.sub.o] are, respectively, the costs of producing the AC and alternative products that are constant across producers (such as the costs of seeds, fertilizers, etc.). The parameter [delta] is a non- negative cost-enhancement factor, and [delta]a is the cost component that varies across producers and captures the degree of relative inefficiency of the producer with a > 0. For simplicity of exposition, we assume a fixed proportions technology between the farm product and the final consumer product, and we normalize the returns to the alternative crop to zero.

[FIGURE 2 OMITTED]

The producer with differentiating attribute [A.sub.US], where [A.sub.US]:[[pi].sub.US] = [[pi].sub.o], is indifferent between producing a unit of the AC and a unit of the alternative crop (see Figure 2). Producers with differentiating attribute a [member of] [0, [A.sub.US]) find it optimal to grow the AC, while producers with a [member of] ([A.sub.US], [bar.A]] grow the alternative product. The quantity of AC supplied domestically is

[x.sup.S.sub.US] = [A.sub.US] = [p.sup.f.sub.US] - [W.sub.US]/[delta], (6)

and the supply function of domestic AC can be written as

[p.sup.f.sub.US] ([s.sup.S.sub.US]) = [W.sub.US] + [delta][x.sup.S.sub.US]. (7)

Aggregate producer welfare is given by the area under the effective net returns curve in Figure 2 as

[w.sup.P] = [([P.sup.f.sub.US]).sup.2]/2[delta]. (8)

Retailer Behavior

Retailers buy ACs from domestic producers and importers and sell them to consumers. Let the supply function of imported AC be

[p.sup.S.sub.M] ([x.sup.S.sub.M]) = A + b[x.sup.S.sub.M], (9)

where [p.sup.S.sub.M] is the price paid by retailers for the imported AC, [x.sup.S.sub.M] is the imported quantity, A is a shifter of the supply of AC from the "rest of the world" (capturing production conditions in the rest of the world, costs of transportation, exchange rate effects, etc.), and b is a slope parameter. The total supply of unlabeled AC faced by retailers (i.e., the sum of the domestically grown and imported ACs) is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (10)

To focus on the empirically relevant case in which any unlabeled AC has a strictly positive probability of being of foreign origin, our analysis considers the case when [p.sup.S.sub.NL] PNL > max{A, [w.sub.US]}, while to capture potential retailer market power (10) when buying and selling AC (see Dimitri, Tegene, and Kaufman 2003), the problem of retailer i (i = 1, ..., N) is expressed as

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (11)

where IM represents the per-unit marketing margin (capturing all costs incurred by the retailer in the supply chain from the farm gate or

the port of entry to the shelf). All other variables are as previously defined.

Using Equations 3 and 10, the optimality condition is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (12)

where [[theta].sup.S.sub.NL] = ([partial derivative] [x.sup.S.sub.NL]/[partial derivative] [x.sub.NLi])([x.sup.S.sub.NLi][x.sup.S.sub.NL]) and ([partial derivative] [x.sup.D.sub.NL]/[partial derivative][x.sub.NLi])([x.sub.NLi]/[x.sup.D.sub.NL]), represent the conjectural variation elasticities on the supply and demand faced by retailer i. The parameters [[theta].sup.S.sub.SL] and [[theta].sup.D.sub.NL] take values between zero and one, with a higher value representing a higher degree of market power. It is important to note that this framework of analysis can capture cases in which retailers have market power when buying and selling (oligemporism/ monemporism), when retailers have market power only when selling (oligopoly/monopoly), when retailers have market power only when buying (oligopsony/monopsony), and when retailers do not have any market power.

[FIGURE 3 OMITTED]

The optimality condition (Eqn. 12) requires retailers to choose the level of output that equates their perceived marginal revenue (left term in Eqn. 12, represented by MR in Figure 3) with their perceived marginal outlay (right term in Eqn. 12, represented by MO in Figure 3). Aggregate retailer profits are given by the sum of the individual profits over all retailers (i.e., [PI] = [[summation].sup.N.sub.i-1][[PI].sub.i]).

Market Equilibrium

Figure 3 depicts the market equilibrium before the introduction of MCOOL. Based on the optimality condition in Equation 12, the equilibrium quantity of non-labeled product is

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (13)

The equilibrium quantity produced by domestic farmers is derived using Equations 6, 10, and 13:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (14)

while the equilibrium quantity of imported AC is obtained from Equations 9, 10, and 13, as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (15)

Note that, while not shown here, the full system of prices and welfare measures can be derived by substituting the equilibrium quantities into the corresponding expressions.

Post-MCOOL

As mentioned previously, under MCOOL retailers are required to inform consumers about the origin of the AC, allowing them to distinguish between domestic and imported ACs. To comply with the regulation, all AC suppliers are required to maintain records identifying the immediate previous source and immediate subsequent recipient of a covered commodity. Thus, MCOOL is expected to result in extra record-keeping costs for both producers and retailers of the AC. Following the structure of the previous section, we start by analyzing the behavior of consumers, producers, and retailers, and then we derive the market equilibrium in the presence of MCOOL. Comparing the resulting equilibrium conditions to those prior to the introduction of MCOOL enables us to determine the market and welfare effects of MCOOL.

Consumer Behavior

Under MCOOL consumers have the choice between the labeled domestic AC, the labeled imported AC, the substitute product, and not consuming any of these products. The utility function of the consumer with differentiating attribute r becomes

[U.sub.US] = U - [[mu].sub.r] - [p.sub.US] if a unit of the labeled domestic AC is consumed;

[U.sub.M] = U - [lambda]r - [p.sub.M] if a unit of the labeled imported AC is consumed;

[U.sub.s] = U - [tau]r - [p.sub.s] if a unit of a substitute product is consumed; and

[U.sub.x] = O if none of these products is consumed, (16)

where [P.sub.US] and [p.sub.M] are the unit consumer prices of labeled domestic and imported products, respectively, and [lambda] and [mu] are non-negative utility discount factors associated with the consumption of domestic and imported products, respectively. All other variables are as previously defined. To capture the potential consumer preference for domestic products, (11) it is assumed that [lambda] > [mu], with the difference [gamma] = [lambda] - [mu] reflecting the strength of consumer preference for domestic products (i.e., the greater is [lambda]r, the stronger is the preference for domestic products of the consumer with differentiating attribute r). This formulation of the utility function captures the notion of vertical product differentiation, according to which, if both imported and domestic products were offered at the same price, all consumers would choose the domestic AC. To capture the empirically relevant case in which these products coexist in the market under MCOOL, we focus our analysis on the case where [p.sub.US] > [p.sub.M]. (12)

[FIGURE 4 OMITTED]

The consumer with differentiating characteristic [r.sub.M]:[U.sub.M] = [U.sub.US] is indifferent between consuming a unit of the imported and a unit of the domestic product, and the consumer with [r.sub.s]: [U.sub.M] = [U.sub.S] is indifferent between consuming the imported product and the substitute product, while the consumer with [r.sub.0]: [U.sub.US] = 0 is indifferent between consuming the domestic product and not consuming any of the three products (see Figure 4). The quantities demanded of labeled imported and domestic products are, respectively, (13)

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (18)

and the inverse demands for the two products under MCOOL are

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (19)

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (20)

The aggregate consumer welfare is given by the area under the effective utility curve in Figure 4 as

[W.sup.C.sub.COOL] = [(U-[p.sub.US]).sup.2]/2[mu] + [([p.sub.US]-[p.sub.M]).sup.2]/2[gamma] + [([p.sub.M]- [p.sub.S]).sup.2]/2([tau]-[lambda]). (21)

Producer Behavior

As mentioned previously, in the presence of MCOOL, producers need to maintain a record-keeping system to provide credible information to retailers about the origin of the AC. (14) Representing the unit cost of record keeping by J, the quantity supplied of domestic AC becomes

[x.sup.S.sub.US] = [p'.sup.f.sub.US] - [w.sub.US] - J/[delta], (22)

and the supply function of the domestic AC is

[p'.sup.f.sub.US] [x.sup.X.sub.US] = [w.sub.US]+J+[delta] [x.sup.S.sub.US] (23)

Producer welfare is then

[W.sup.P.sub.COOL] = [([p'.sup.f.sub.US] - [w.sub.US] - J).sup.2] / 2[delta] (24)

Retailer Behavior

Under MCOOL, retailers face increased costs of segregation and labeling of the AC, denoted by K. (15,16) However, the mandatory requirement of providing the origin information allows retailers to separate the markets for domestic and imported ACs, take advantage of a consumer preference for the domestic product, and increase their profitability relative to the pre-MCOOL situation. The problem of retailer i becomes

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (25)

where all variables are as previously defined. Note that since imported food items needed some form of origin information when entering the country, even before MCOOL, importers will not incur additional labeling costs as a result of the MCOOL regulation. (17) Thus, the supply of imported AC is given by Equation 9.

The optimality conditions for an interior solution require retailers to equate marginal outlays with their perceived marginal revenues in each market. It is important to note that because our assumptions are that [gamma] > 0 and [p.sub.US] > [p.sub.M], a scenario in which imports are driven out of the market is not possible.

Market Equilibrium under MCOOL

Figure 5 depicts the market equilibrium under MCOOL when both products coexist in the market. From the retailer problem we can derive the equilibrium quantities of domestic and imported products as

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (26)

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (27)

Both equilibrium quantities depend positively on the price of the substitute in consumption and negatively on the marketing margin and the cost of labeling for retailers. The equilibrium quantity of domestic (imported) AC decreases (increases) with the labeling cost at the farm level and the domestic cost of production and increases (decreases) with the cost of the imported product. An increase in the market power of retailers in one market (when buying and/or selling) reduces the equilibrium quantity in that market and increases the equilibrium quantity in the other market, resulting in a reduction in the total quantity of the product traded in equilibrium. Finally, an increase in the preference for domestic products increases the equilibrium quantity of domestic product, reduces the equilibrium quantity of its imported counterpart, and increases the total size of the market for the agricultural product.

[FIGURE 5 OMITTED]

Market and Welfare Effects of MCOOL Introduction

The change in consumer welfare after MCOOL introduction is the outcome of two opposite effects: a utility effect and a price effect. As mentioned previously, while in the pre-MCOOL situation consumers are uncertain about the origin of the unlabeled AC, after the implementation of MCOOL they are able to assess the origin of the product and make informed consumption decisions. Labeling, therefore, moves the market from a pooling equilibrium (where domestic and imported ACs are marketed together as an unlabeled good) to a separating equilibrium, where the different products are recognized and treated as such.

The utility effect consists of a reduction in the willingness to pay (WTP) for the inferior imported product and an increase in the WTP for the superior domestic product (relative to the WTP for the non-labeled product) after the introduction of MCOOL (i.e., [mu] < [THETA] < [lambda]). (18) Put in a different way, labeling increases the utility associated with the consumption of the high-quality domestic product and reduces the utility associated with the consumption of the low-quality imported product relative to the case in which these products are not labeled (and the utility associated with the consumption of the unlabeled product is an average of the utilities associated with the consumption of the domestic and the imported products).

The price effect consists of the change in the price of the imported and domestic products in the post-MCOOL scenario relative to the price of the unlabeled product in the pre-MCOOL scenario. In particular, as a result of the increased costs and consumer valuation, Pus" exceeds PNL. The effect of MCOOL on [p.sub.M] depends on the relative magnitude of the reduction in consumer valuation and the increase in the costs of the imported product under the MCOOL regime.

An important consequence of the costs and utility effects of MCOOL is the creation of winners and losers among the domestic consumers and suppliers of the regulated product. Figure 6 illustrates the interaction of these price and utility effects on consumer welfare. Consumers with weak preference for domestic products (i.e., those with a low r) are better off after MCOOL introduction, since the reduction in the price of the imported product (relative to the price of the non-labeled product) is greater than the decrease in the WTP for the imported product (relative to the WTP for the unlabeled product). The welfare gains of consumers with weak preference for domestic food that end up consuming the imported product after the introduction of MCOOL are given by area abc. Consumers with a strong preference for domestic products (i.e., those with a high r) are also better off after MCOOL introduction, since the increase in the price of the domestic product (relative to the price of the unlabeled product) is smaller than the increase in the WTP for the domestic product (relative to the WTP for the unlabeled product). The welfare gains of consumers with a strong preference for domestic products that end up consuming the domestic AC after the introduction of MCOOL are given by area fgh.

Consumers with moderate preference for domestic products lose after the introduction of MCOOL, and their losses are given by area cdf in Figure 6. From this total area, the part cde represents losses to consumers that consume the imported product after the introduction of MCOOL and whose benefits from the reduced price of the imported product are outweighed by the reduced utility associated with the consumption of the labeled imported product. The rest of the losses (i.e., area edf) are incurred by consumers of the labeled domestic product whose benefits from the increased utility of the labeled domestic product are outweighed by the welfare losses from the increased price of the domestic product under MCOOL. Thus, not only does the introduction of MCOOL reduce the welfare of consumers with moderate preference for domestic products that find it optimal to consume the labeled imported product, it also reduces the welfare of consumers who prefer the domestic product in the presence MCOOL. The change in aggregate consumer welfare from the introduction of MCOOL is then given by abc +fgh - cdf, with the size of the different areas (i.e., the magnitude of the welfare gains and losses) being dependent on the strength and distribution of consumer preferences for domestic products, the market conditions, labeling costs, and retailer market power in the two supply channels (that affect the consumer prices of domestic and imported ACs). (19) The stronger the consumer preference for domestic products and/or the smaller the concentration of consumers with moderate preference for domestic products and/or the lower the labeling costs and retailer market power, the greater the consumer welfare gains from MCOOL introduction.

[FIGURE 6 OMITTED]

Producers of the AC are also affected by the introduction of MCOOL. The change in producer welfare is also the result of two effects, namely a cost effect (J) and a price effect [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]. A necessary and sufficient condition for producers to gain from MCOOL introduction is that the farm price increase exceeds the increase in labeling costs. In addition to all farmers of the regulated AC realizing a welfare increase, when the increase in the farm price exceeds the costs of MCOOL, at least some producers of the alternative crop (those located between [x.sup.Eq.sub.US,NL] and [x.sup.Eq.sub.US] in Figure 7a) find it optimal to switch their production and enter the market of the AC. The increase in the size of the market for AC is given by [x.sup.Eq.sub.US] - [x.sup.Eq.sub.US,NL] in Figure 7a. If, on the other hand, the change in the farm price due to MCOOL is less than the farm costs of this labeling regime, the net returns to the production of the AC fall, all domestic AC producers lose, and some of those producers (those located between [x.sup.Eq.sub.US] and [x.sup.Eq.sub.US,NL] in Figure 7b) will find it optimal to exit the market and switch their production to alternative crops.

[FIGURE 7 OMITTED]

Finally, retailers will gain from the introduction of MCOOL when the benefits from being able to separate the markets for domestic and imported products (and being able to take advantage of the increased consumer willingness to pay for the domestic produce) outweigh the segregation and labeling costs involved.

4. An Application: Fresh-Market Apples

In this section, the potential effects of MCOOL introduction in the market for fresh apples are simulated under different scenarios. The choice of the specific product was based on its significance for the fruit sector (20) as well as on the coexistence of imported and domestic products in the market year-round.

The methodology applied to simulate the market and welfare effects of MCOOL introduction under different scenarios consists of three steps. First, the structural parameters of the pre-MCOOL model ([THETA], b, [delta], [[theta].sup.D.sub.NL], and [[theta].sup.S.sub.NL]) are estimated using non-linear ordinary least squares on U.S. data from the relevant markets. Second, to capture seasonal supply and demand patterns, the pre-MCOOL model is calibrated with quarterly data at the mean of the most recent three years. In particular, using information on prices, quantities, and the estimated structural parameters, the values of A, IM, [w.sub.US], and the market share of imported apples prior to MCOOL, [psi], are calibrated at the mean of the quarterly data. Finally, the post-MCOOL model is simulated for different scenarios on the costs of compliance with MCOOL provisions (K and J) and consumers' preference for domestic products ([mu] and [gamma]), consistent with the calibrated model for the pre-MCOOL situation. The effects of the implementation of MCOOL are then derived by comparing the equilibrium prices, quantities, and welfare measures in the pre- and post-MCOOL scenaria.

The costs of compliance with MCOOL provisions for producers and intermediaries are those derived from Sparks Companies Inc. (2003) and the Federal Register (2009) (see footnotes 14 and 15). To our knowledge, these are the only studies that report estimates of the costs of compliance with MCOOL provisions for fruits and vegetables.

The structural model determined by Equations 2, 10, and 12 is estimated with a seemingly unrelated non-linear least squares regression in SAS 9.1 using quarterly average data over the 1999-2007 period in log-log form with fixed quarter effects in all equations to account for the seasonal pattern of shipments of imported apples. (21) For identification purposes, the demand equation (i.e., Eqn. 2) is augmented to include disposable personal income per capita (Bureau of Economic Analysis 2007) and population (U.S. Census Bureau 2007) as explanatory variables. The supply equation (i.e., Eqn. 10) is augmented to include U.S. apple yield as a proxy for global productivity change in apple production and a time trend. The equilibrium equation (Eqn. 12) is augmented by a time trend to capture long-run structural adjustments in prices, and the market power parameters are bounded to the [0, 1] interval.

Retail and growers' prices for fresh red apples, derived from Pollack and Perez (2007), are used, respectively, as the equilibrium prices paid by consumers to retailers and by retailers to domestic producers and importers of the non-labeled fresh-market apples. Retail prices are adjusted to allow for 4% waste and spoilage incurred during marketing by multiplying them by 0.96. The equilibrium quantity of unlabeled fresh-market apples of U.S. origin is derived as the difference between total U.S. shipments of fresh-market apples and U.S. exports (Agricultural Marketing Service, USDA). The equilibrium quantity of total unlabeled fresh-market apples is obtained as the sum of shipments of fresh-market apples of U.S. origin and of imported origin (Agricultural Marketing Service, USDA). The price of the substitute is derived as the weighted average of the retail prices of oranges and bananas, with the weights being the quantities consumed of each fruit in each quarter.

Given the relevance of labor costs in total farm costs,22 for estimation purposes [w.sub.US] is proxied by the value of the wage rate of field workers in farm employment (National Agricultural Statistics Service, USDA). Similarly, since credit intermediation represents the second most important single item in total intermediate use of fruit farming (with the most important item being the support activities for agriculture and forestry), the ninety-day AA nonfinancial commercial paper interest rate reported by the Federal Reserve (see http://www.federalreserve.gov/datadownload/) was used to proxy marketing margins, IM. The shifter of the supply curve for imported apples, A, is proxied by the cost, insurance, and freight (CIF) values of total imports of fresh apples (see http://www.fas.usda.gov). All prices and income are deflated by the U.S. city average consumer price index for all items and all urban consumers (1982-1984 = 100; see http://data.bls.gov/cgi-bin/surveymost).

Appendix 1 summarizes the descriptive statistics of the variables in levels. As it is not possible to estimate the parameters [[theta].sup.D.sub.NL] and [theta].sup.S.sub.NL] simultaneously, a grid search was conducted by fixing the value of [[theta].sup.D.sub.NL] and estimating all other parameters of the model (including [[theta].sup.S.sub.NL]. The estimated model with retailers being unable to exercise market power over the consumers of apples (i.e., the model with [[theta].sup.D.sub.NL] = 0) had the highest [R.sup.2] values in all three equations, and it constitutes the basis for the present analysis.

The [R.sup.2] of each fitted equation is greater than 0.70. The hypothesis of normality of the system of residuals cannot be rejected with the Mardia Skewness, Mardia Kurtosis, and Henze-Zirkler T system-wise normality tests, nor can the hypothesis of normality of each equation be rejected using the Shapiro-Wilks test. Homoscedasticity of the residuals of each estimated equation cannot be rejected using the White's test. The null hypothesis of the residuals being white noise cannot be rejected for the demand and supply equations with the Godfrey's serial correlation test at the 5% level of significance, although autocorrelation of the residuals is present in the equilibrium equation (Appendix 2). The estimated parameters on log-log quarterly data indicate that the short-run U.S. demand for unlabeled fresh-market apples at retail level is price inelastic. Using Wald tests, the hypothesis that the own-price elasticity of demand belongs to the [-0.1, -0.6] range, with a mean estimate of -0.35, could not be rejected, while the hypothesis that the own-price elasticity of demand is equal to or lower than -0.7 was rejected at the 10% confidence level. These estimates are consistent with previous studies: the average own-price elasticity of demand for apples in a literature review conducted by the USDA's Economic Research Service (ERS) is -0.35, ranging from -0.7 to -0.122 (see http://www.ers.usda.gov/Data/Elasticities/). The hypothesis that the own-price elasticity of total supply of fresh-market apples belongs to the [0.2, 1.4] range, with a mean estimate of 0.80, could not be rejected at the 10% confidence level. The hypothesis that the parameter [[theta].sup.S.sub.NL] that captures retailers' monopsonistic power equals zero could not be rejected at the 10% confidence level, indicating that retailers have been unable to exert market power in the supply chain of apples.

Using the quarterly average value of the variables in levels for the years 2005-2007 and the estimated parameters, the model is simulated on different values of (i) the costs of complying with MCOOL regulation and (ii) the value of consumers' preference for domestic apples. Two scenarios are considered: a low-cost scenario and a high-cost scenario. Parameter estimates from Appendix 2 and prices and quantities in levels from Appendix 1 were plugged into Equations 6, 10, and 12 to derive the implicit values of the shifter of the supply of imports, A; the cost of apple production in the United States, [w.sub.US]; the marketing margin, IM; and the base level of utility, U. The derivation of A, [w.sub.US], and IM is necessary in calibrating the model to a base level and in accommodating the imbalances stemming from the use of average price and quantity data. Simulations are generated on a quarterly basis to reflect the seasonal patterns of apple imports.

In the low-cost scenario, we use the estimates of the Federal Register (2009) and set J = 0.025 cents/lb and K = 1 cent/lb; these values represent, respectively, 0.1% of the farm price and 1.01% of the retail price in the pre-MCOOL situation. The high-cost scenario assumes that the costs of compliance are similar to those reported by the Sparks Companies Inc. (2003) (i.e., J = 0.033 cents/lb and K = 4.5 cents/lb [which is the midpoint of the 3-6 cents/lb reported range], and they represent, respectively, 0.12% of the farm price and 4.59% of the retail price in the pre-MCOOL situation). In both scenarios, the price elasticity of supply of non-labeled apples is set equal to 0.3 (i.e., the lower bound of the 90% confidence interval), and the elasticity of supply of U.S. apples is set equal to 0.2, implying an elasticity of supply of imported apples equal to 1.36. (23) Using the estimated parameter [THETA], consumer preferences for domestic apples are simulated for different values of [lambda], and [mu] (see footnote 18).

Table 1 summarizes our results (24) on the market and welfare effects of MCOOL for fresh apples (i.e., the effects of MCOOL on the quantities and prices of domestic and imported apples and the welfare of consumers, producers, and retailers on a quarterly basis under low and high labeling costs). Our analysis indicates that regardless of the size of the labeling costs and the strength of the consumer preference for domestic products, the introduction of MCOOL increases the retail price of the U.S.-grown apples ([p.sub.US]) and reduces both imports and the price received by the importers of fresh apples ([x.sup.Eq.sub.M] and [p.sup.S.sub.M] respectively). Being unable to exert market power to consumers and suppliers of fresh apples, retailers see no change in their market profits ([PI]), making any fixed costs associated with MCOOL a loss for the sector.

The effect of MCOOL on the rest of the market and welfare parameters depends on both the strength of the consumer preference for domestic products and the size of the labeling costs associated with MCOOL. In particular, the stronger the consumer preference for domestic products ([lambda]/[mu]), the greater the likelihood that the introduction of MCOOL will reduce the retail price of the imported product ([p.sub.M]) and will increase the equilibrium quantity and farm price of U.S. apples [x.sup.Eq.sub.US] and [p.sup.f.sub.US], respectively), the total consumption of fresh apples ([x.sup.Eq.sub.T]), and the welfare of consumers and producers (CW and P W, respectively).

The threshold values of [lambda]/[mu] that cause [x.sup.Eq.sub.US], [p.sup.f.sub.US], [x.sup.Eq.sub.T], CW, and PW to rise after the introduction of MCOOL increase with an increase in the labeling costs, indicating that the lower the labeling costs associated with MCOOL, the greater the likelihood that the introduction of the policy will increase the quantity and farm price of the domestic product and the greater the likelihood that it will benefit the domestic consumers and producers of fresh apples. Intriguingly, the level of [lambda]/[mu] required for consumer welfare to increase after the introduction of MCOOL exceeds that required for producer welfare to increase under both low and high labeling costs, indicating that domestic producers are more likely beneficiaries of the policy than are consumers of fresh apples.

5. Conclusions

This study provides a new framework of analysis of the market and welfare effects of MCOOL for fruits and vegetables that accounts for heterogeneous consumer preferences for domestic products, differences in producer agronomic characteristics, and retailer market power when buying and selling these products. The market and welfare effects of MCOOL have been shown to be case-specific and dependent on the labeling costs at the farm and retail levels, the strength of consumer preference for domestic products, the market power of retailers, the marketing margin along the supply chain, and the relative costs of imported and domestic products.

Once consumer heterogeneity is incorporated into the analysis, previous arguments that all consumers will benefit from the implementation of MCOOL are easily rejected. Our analysis shows that in most cases, some consumers will benefit from the regulation, namely those with very weak and those with very strong preference for the domestic product, while others will lose. Producers are shown to benefit from the regulation when the labeling costs at the farm level are offset by a farm price increase after MCOOL introduction, while retailers are shown to gain from MCOOL when the benefits from being able to separate the markets for domestic and imported products and being able to take advantage of an existing consumer preference for the domestic produce outweigh the labeling and segregation costs. Our finding that the introduction of MCOOL creates winners and losers among consumers, producers, and retailers provides a rationalization of the widely differing views on the desirability of MCOOL in the United States.

Simulation results for the U.S. market of fresh apples indicate that consumers and producers are more likely to gain from the implementation of MCOOL under low labeling costs and/or a strong consumer preference for domestic apples. The minimum consumer preference for domestic apples required for consumer welfare to increase was shown to be higher than that required for producer welfare to increase, indicating that producers are more likely beneficiaries of MCOOL than are domestic consumers. Being unable to exercise market power to consumers and suppliers of fresh apples, retailers will lose from the implementation of the policy whenever there are fixed costs associated with MCOOL. With regard to the imports of fresh apples, they were shown to decline after the implementation of MCOOL, regardless of the size of labeling costs and the strength of the consumer preference for domestic products.

Finally, it should be pointed out that while our model was applied to the market of apples, the framework of analysis developed in this study is general and could be easily adapted to the idiosyncrasies of any relevant product market of interest. An appropriate calibration of our model for other specialty crops could provide policy makers and stakeholder groups with valuable insights into the potential effects of MCOOL regulation on different food product markets.
Appendix 1
Descriptive Statistics of the Variables Used in the Regression

Variable Proxy

[w.sub.US] Wage rate of field workers in farm employment
 ($/hour)
A CIF values of total imports of fresh apples
 ($/100,000 lb)
[X.sub.NL] Total shipment of fresh-market apples (100,000 lb)

[X.sub.M] Shipments of imported fresh-market apples
 (100,000 lb)
[X.sub.US] Shipments of fresh-market apples of U.S. origin
 (100,000 lb)
IM 90-day AA nonfinancial commercial paper interest
 rate (percentage)
[P.sup.S.sub.NL] Growers' price for fresh Red Apples ($/100,000 lb)
[P.sub.NL] Adjusted retail price for fresh Red Apples
 ($/100,000 lb)
[P.sub.S] Weighted average of retail prices for oranges and
 bananas ($/100,000 lb)
CPI U.S. city average consumer price index for all
 items and all urban consumers (1982-1984 = 100)
Pop U.S. population (in millions)
Yield US U.S. yields (100,000 lb of apples per bearing acre)
Income Disposable personal income per capita
 (current U.S.$)

Variable Mean SD

[w.sub.US] 8.28 0.70
A 33,364.35 10,604.81
[X.sub.NL] 9813.75 1507.76
[X.sub.M] 937 659.71
[X.sub.US] 8876.75 1818.76
IM 3.62 1.87
[P.sup.S.sub.NL] 23,662.9 5970.31
[P.sub.NL] 91,764 8622.13
[P.sub.S] 71,448.1 15,741.6
CPI 182.28 12.43
Pop 289.75 8.59
Yield US 29.57 7.14
Income 28,555.58 3101.58

N = 36 for all variables but [P.sup.S.sub.NL], for which N = 35. SD:
standard deviation.


Appendix 2

Estimation Results for Fresh-Market Apples: Variables in Log-Log Form

Demand Equation:

[X.sub.NL] = a11 + a12 x dq2+ a13 x dq3 + a14 x dq4 + a1y x Income/CPI + x1 x Ps/CPI + a1p x Pop - x2 x [P.sub.NL] /CPI. (A1)

Supply Equation:

[P.sup.S.sub.NL]/CPI = a21 + a22 x dq2 + a23 x dq3 + a24 x dq4 + a25 x YieldUS + (A2) x3 x wus/CPI + (1 - x3) x A/CPI + a2t x trend + x4 x [A.sub.NL].

Equilibrium Equation:

[P.sub.NL]/CPI= a31 + a32 x dq2 + a33 x dq3 + a34 x dq4 + a3p x [P.sup.S.sub.NL]/CPI + (A3) a3im * IM/CPI + ([[theta].sup.D.sub.NL]/x2 + x4 * [[theta].sup.S.sub.NL]) x [X.sub.NL] + a3t x trend,

where dqi is a dummy variable for quarter i (i = 2, 3, 4).
Results from the Non-Linear, Seemingly Unrelated Regression

 Degrees of Normality Test
 Freedom (df) (Shapiro-Wilks)

Equation Model Error [R.sup.2] Value Probability

[X.sub.NL] 7.5 27.5 0.8986 0.95 0.1183
[P.sup.S.sub.NL] 7.5 27.5 0.7011 0.99 0.9238
[P.sub.NL] 8 27 0.7381 0.96 0.2872

 Heteroscedasticity
 Test (White's test)

Equation Statistic df Pr > Chi-square

[X.sub.NL] 26.31 26 0.4461
[P.sup.S.sub.NL] 29.24 29 0.4525
[P.sub.NL] 28.51 29 0.4910

 Godfrey's Serial
 Correlation Test ([rho] = 1)

Equation Statistic Pr > LM

[X.sub.NL] 1.52 0.2180
[P.sup.S.sub.NL] 2.93 0.0872
[P.sub.NL] 5.19 0.0228

Normality tests for the system: Mardia Skewness = 15.38 (p-value =
0.1188); Mardia Kurtosis = 0.41 (p-value = 0.6802); Henze-Zirkler T =
1.50 (p-value = 0.1340).

 Approximate Standard
Parameter Estimates Estimate Error

Demand equation
a11 44.43457 18.9947
a12 -0.06996 0.0276
a13 -0.30316 0.0364
a14 0.04461 0.03
a1y 2.941189 1.1308
a1p -3.11683 1.4748
x1 0.090804 0.0923
x2 0.351299 0.1914

Supply equation
a21 -2.66716 3.9228
a22 -0.5635 0.1027
a23 -0.50922 0.1429
a24 0.077293 0.0868
a25 -1.9688 0.3774
x3 0.86708 0.1827
a2t 0.025361 0.00371
x4 1.253302 0.5337

Equilibrium equation
a31 7.543419 0.3381
a32 0.042037 0.0163
a33 0.045867 0.0162
a34 -0.03818 0.0171
a3p 0.350117 0.0362
a3im 0.022861 0.0092
a3t -0.00557 0.00139
[[theta.sup.S.sub.NL] 0 0
Bound [[theta.sup.S.sub.NL] 2.053468 11.3481
 [less than or equal to] 0

 Approximate Pr >
Parameter Estimates t Value [absolute value of t]

Demand equation
a11 2.34 0.027
a12 -2.53 0.0174
a13 -8.33 <.0001
a14 1.49 0.149
a1y 2.6 0.0149
a1p -2.11 0.044
x1 0.98 0.334
x2 1.84 0.0775

Supply equation
a21 -0.68 0.5023
a22 -5.49 <.0001
a23 -3.56 0.0014
a24 0.89 0.3812
a25 -5.22 <.0001
x3 4.75 <.0001
a2t 6.83 <.0001
x4 2.35 0.0264

Equilibrium equation
a31 22.31 <.0001
a32 2.58 0.0158
a33 2.83 0.0087
a34 -2.23 0.0341
a3p 9.67 <.0001
a3im 2.49 0.0194
a3t -4.01 0.0005
[[theta.sup.S.sub.NL] -- --
Bound [[theta.sup.S.sub.NL] 0.18 0.8604
 [less than or equal to] 0


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(1) Among the supporters of COOL are the Minnesota Apple Growers Association, the Florida Tomato Exchange, the California Tomato Growers Exchange, the Washington Growers Clearing House, the Washington State Farm Bureau, the Washington Farmers Union, the New York State Vegetable Growers Association, the New York National Farmers Organization, the Grower Shipper Association of Central California, the California National Farmers Organization, the California Farm Bureau Federation, the Nebraska Farmers Union, and the American Corn Growers Association of Nebraska (Americans for Country of Origin Labeling 2007).

(2) According to Wal-MartWatch (2007), the top five groups with the highest lobbying expenditures against COOL are the American Farm Bureau Federation; the Grocery Manufacturers of America; Cargill, Inc.; Wal-Mart Stores, Inc.; and the National Food Processors Association.

(3) It is important to note that while the USDA has, prior to COOL established other standards that allowed voluntary labeling of beef and other products (such as "U.S.A. Beef," "Fresh American Beef," and "Product of U.S.A."), no producer found it optimal to participate in any of these programs (Federal Register 2002).

(4) The USDA estimated the first-year record-keeping costs for domestic producers, handlers, processors, wholesalers, and retailers at $641 million, with subsequent maintenance costs of $506 million per year (Federal Register 2009, p. 2700).

(5) It is important to note that while some advocates of MCOOL believe that the regulation may appeal to consumers" food safety concerns, MCOOL is not a food safety or animal health measure since it "does not provide the traceability required to permit the government to rapidly respond to a contamination or disease outbreak" (Federal Register 2003, p. 61945). Both imported and domestic food products must meet the same food safety standards determined by the Food Service Inspection System and/or the Food and Drug Administration Agency.

(6) Note that country-of-origin requirements have already been in place for many imported food items (Tariff Act of 1930, as amended: the Federal Meat Inspection Act, as amended; and other related legislation), although not necessarily at the retail level. In particular, effective legislation requires most imports to bear labels informing the "ultimate purchaser" of their country of origin. The ultimate purchaser has been defined by the U.S. Bureau of Customs and Border Protection as the last U.S. person who will receive the article in the form in which it was imported. The law requires that containers holding imported fresh fruit and vegetables must be labeled with country-of-origin information when entering the United States. If produce in the container is packed in consumer-ready packing and sold to the consumer (e.g., grapes in bags), then that item must already be labeled as well. It is important to note, however, that before the implementation of MCOOL a retailer could take loosen product out of a labeled container and display it in an open bin, selling each individual piece of produce with no origin information. The bin did not need to be labeled prior to MCOOL.

(7) The 2008 Farm Bill and the August 1, 2008, interim final rule authorized the use of State, regional, or locality label designations in lieu of country of origin for perishable agricultural commodities, peanuts, pecans, ginseng, and macadamia nuts. Therefore, labels such as "Washington apples," "Georgia's Vidalia onions," "Idaho potatoes," and "California Grown" can be accepted in lieu of MCOOL.

(8) A version of the model with general functional forms is available from the authors upon request.

(9) The ramifications of relaxing the assumption of uniform distribution are straightforward and are discussed throughout the article. Here, for instance, the less skewed the distribution of consumers toward the ends of the [0, R] spectrum, the greater the demand for the non-labeled product and the greater the aggregate consumer welfare.

(10) Richards and Patterson (2003) and Sexton, Zhang, and Chalfant (2003) find direct econometric evidence on the market power of retailers over suppliers for grapefruit, apples, and lettuce and over consumers for apples, oranges, grapefruit, fresh grapes, tomatoes, and lettuce. Glaser, Thompson, and Handy (2001) find indirect evidence of the market power of retailers over bagged salad shippers in the form of slotting fees and over lettuce shippers in the form of rebates and volume discounts.

(11) Mabiso et al. (2005) conducted an experimental auction in Georgia, Florida, and Michigan to elicit willingness to pay for U.S. origin labeling in apples and tomatoes and found that consumers were willing to pay about 49 cents/lb of produce for country-of-origin labeling. As pointed out by the authors, however, "extrapolative generalizations based on the study may be erroneous" (p. 11), since young highly educated women with high pre-tax household income were substantially over-represented in their sample.

(12) Note that our model can be easily modified to analyze the case in which part of the imported product is pre- labeled prior to the introduction of MCOOL. In such a case, prior to MCOOL consumers would have the choice between the non-labeled AC (consisting of the unlabeled domestic and imported products) and the pre-labeled imported product, while after the introduction of MCOOL consumers would have the choice between the labeled domestic and imported products. While this formulation would change the quantitative nature of our results (as the preference parameter associated with the consumption of the labeled imported product in the presence of MCOOL would be the same as that associated with the pre-labeled imported product prior to MCOOL), the qualitative nature of the results of our study would remain unaffected.

(13) In the case of a non-uniform consumer distribution, the greater the concentration of consumers between [r.sub.M] and [r.sub.0] ([r.sub.s] and [r.sub.M]), the greater the demand for the domestic (imported) labeled product.

(14) The Sparks Companies Inc. (2003) report an estimated $20 million cost of labeling for fruit and vegetable producers, implying 0.033 cents/lb on a farm weight basis (obtained by dividing the $20 million by the reported 60 billion pounds of fruit and vegetable produced). The USDA estimate of this cost is 0.025 cents/lb (Federal Register 2003, p. 61966; 2009, p. 2688).

(15) The Sparks Companies Inc. (2003) report an estimated 3-6 cents/lb cost of labeling fruits and vegetables for processors, wholesalers, and retailers, while the USDA estimate of the incremental labeling costs for intermediaries is 1 cent/lb (Federal Register 2009, p. 2668).

(16) Note that our assumption that the labeling costs are variable is made for simplicity and does not affect the retailer behavior. What the existence of fixed labeling costs would affect is the total retailer profit in the presence of MCOOL.

(17) Although the USDA recognizes this fact (Federal Register 2009, p. 2686), the computable general equilibrium model assumes that labeling costs at the farm level are the same as those laced by the importer of agricultural commodities.

(18) Note that even though consumers cannot assess the origin of unlabeled AC prior to MCOOL, they do know the probability that the unlabeled product is imported. Let [psi] = [x.sup.Eq.sub.M]/([x.sup.SEq.sub.US] + [x.sup.Eq.sub.M]) be the share of imports in the total supply of the AC. Under rational expectations, [psi]represents, then, the probability that any given unit of unlabeled product in the pre-MCOOL scenario is an imported AC. and the utility discount factor for the non-labeled product, [THETA], is the weighted average of the utility discount factors associated with the consumption of the domestic and imported products: [THETA] = [psi][lambda] + (1-[psi])[mu] = [mu] + [psi][gamma]. As pointed out by an anonymous reviewer, the share of the imported AC is not constant and can vary as a result of changes in domestic production and/or seasonality, for instance.

(19) For simplicity of exposition, we assume here that the price of the substitute is not affected by the introduction of MCOOL. Obviously, if MCOOL caused [p.sub.s] to increase (fall), the [U.sub.s] curve in Figure 6 would be shifted downwards (upwards), and consumers of the substitute product would lose (gain) from the enactment of the MCOOL regime.

(20) Apples are the fruit with the second highest per capita consumption in the United States (with the most popular fresh fruit being the banana [Pollak and Perez 2007]). Around 94% of fresh apples are purchased by consumers at retail stores (such as supermarkets, grocery stores, and convenience stores), while the rest are purchased by food service establishments (Perez et al. 2001).

(21) Imported apples accounted for about 5% of total apple consumption in the first quarter of 2007, for 20% in the second quarter, for 13% in the third quarter, and for 4% in the fourth quarter of that year.

(22) Labor costs represent, on average, 35% of total variable costs and 19% of total costs of establishing and operating a Golden Delicious apple orchard using integrated production practices. Similarly, labor costs represent, on average, 32% of total variable costs and 17% of total costs of establishing and operating a Golden Delicious apple orchard using conventional production practices (Glover et al. 2002). Schotzko and Granatstein (2004) report that labor costs represented, on average, 55% of total variable costs and 31% of total costs of production of Red Delicious apples between 1985 and 1992. Caprile et al. (2001) report that labor costs represent 48% of total cultural costs, 96% of total harvest cost, and 23% of total cash costs of producing Granny Smith apples in the San Joaquin Valley.

(23) Baumes and Conway (1985) estimate the elasticity of supply for fresh U.S. apples at the farm level at 0.001. Krissoff, Calvin, and Gray (1997) assume the supply elasticity in different countries to be equal to 0 or 0.1. Yue, Beghin, and Jensen (2006) assume the short-run supply elasticity to be equal to 0.1 and the long-run supply elasticity to be equal to 1.

(24) A graphical illustration of the results is available from the authors upon request.

Alejandro Plastina, Economist at the International Cotton Advisory Committee, 1629 K Street, NW, Suite 702, Washington, DC 20006, USA; E-mail alejandro@icac.org.

Konstantinos Giannakas, Department of Agricultural Economics, University of Nebraska Lincoln, 217 Filley Hall, Lincoln, NE 68583, USA: E-mail kgiannakas@unl.edu; corresponding author.

Daniel Pick, Deputy Director for Research and Program Management at U.S. Department of Agriculture (USDA), Economic Research Service, Room N5117, 1800 M Street, NW. Washington, DC 20036, USA; E-mail dpick@ers.usda.gov.

This research is based on Plastina's doctoral dissertation at the University of Nebraska Lincoln and was funded by cooperative agreement 43-3AEK-5-80057 between the USDA Economic Research Service and the University of Nebraska. The views expressed herein are those of the authors and do not necessarily reflect the views of the USDA.

Received: May 2009; accepted: May 2010.
Table 1. Market and Welfare Effects of MCOOL for Fresh Apples

 [x.sup.Eq.sub.US] [x.sup.Eq.sub.M]

Low costs
 [Q.sub.1] + if [lambda]/[micro] > 1.01 -
 [Q.sub.2] + -
 [Q.sub.3] + -
 [Q.sub.4] + if [lambda]/[micro] > 1.05 -

High costs
 [Q.sub.1] + if [lambda]/[micro] > 1.16 -
 [Q.sub.2] + if [lambda]/[micro] > 1.03 -
 [Q.sub.3] + -
 [Q.sub.4] + if [lambda]/[micro] > 1.25 -

 [p.sub.US] [p.sub.M]

Low costs
 [Q.sub.1] + - if [lambda]/[micro] > 1.05
 [Q.sub.2] + - if [lambda]/[micro] > 1.03
 [Q.sub.3] + -
 [Q.sub.4] + - if [lambda]/[micro] > 1.11

High costs
 [Q.sub.1] + - if [lambda]/[micro] > 1.59
 [Q.sub.2] + - if [lambda]/[micro] > 1.15
 [Q.sub.3] + -
 [Q.sub.4] + - if [lambda]/[micro] > 2.26

 [p.sup.f.sub.US] [p.sup.S.sub.M]

Low costs
 [Q.sub.1] + if [lambda]/[micro] > 1.01 -
 [Q.sub.2] + -
 [Q.sub.3] + -
 [Q.sub.4] + if [lambda]/[micro] > 1.05 -

High costs
 [Q.sub.1] + if [lambda]/[micro] > 1.16 -
 [Q.sub.2] + if [lambda]/[micro] > 1.03 -
 [Q.sub.3] + -
 [Q.sub.4] + if [lambda]/[micro] > 1.25 -

 [x.sup.Eq.sub.T]

Low costs
 [Q.sub.1] + if [lambda]/[micro] > 1.13
 [Q.sub.2] + if [lambda]/[micro] > 1.02
 [Q.sub.3] +
 [Q.sub.4] + if [lambda]/[micro] > 1.11

High costs
 [Q.sub.1] + if [lambda]/[micro] > 1.59
 [Q.sub.2] + if [lambda]/[micro] > 1.13
 [Q.sub.3] +
 [Q.sub.4] + if [lambda]/[micro] > 1.62

 CW

Low costs
 [Q.sub.1] + if [lambda]/[micro] > 1.71
 [Q.sub.2] + if [lambda]/[micro] > 1.24
 [Q.sub.3] + if [lambda]/[micro] > 1.37
 [Q.sub.4] + if [lambda]/[micro] > 1.83

High costs
 [Q.sub.1] + if [lambda]/[micro] > 2.70
 [Q.sub.2] + if [lambda]/[micro] > 1.63
 [Q.sub.3] + if [lambda]/[micro] > 1.79
 [Q.sub.4] + if [lambda]/[micro] > 3.15

 PW [PI]

Low costs
 [Q.sub.1] + if [lambda]/[micro] > 1.01 ct
 [Q.sub.2] + ct
 [Q.sub.3] + ct
 [Q.sub.4] + if [lambda]/[micro] > 1.01 ct

High costs
 [Q.sub.1] + if [lambda]/[micro] > 1.16 ct
 [Q.sub.2] + if [lambda]/[micro] > 1.03 ct
 [Q.sub.3] + ct
 [Q.sub.4] + if [lambda]/[micro] > 1.25 ct

 TW

Low costs
 [Q.sub.1] + if [lambda]/[micro] > 1.16
 [Q.sub.2] + if [lambda]/[micro] > 1.03
 [Q.sub.3] +
 [Q.sub.4] + if [lambda]/[micro] > 1.21

High costs
 [Q.sub.1] + if [lambda]/[micro] > 1.67
 [Q.sub.2] + if [lambda]/[micro] > 1.15
 [Q.sub.3] +
 [Q.sub.4] + if [lambda]/[micro] > 1.83

[Q.sub.i]: quarter i with i [member of] {1, 2, 3, 4}; TW: total
welfare; ct: constant; +: denotes increase; -: denotes decrease.
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Comment:Market and welfare effects of mandatory country-of-origin labeling in the U.S. specialty crops sector: an application to fresh market apples.
Author:Plastina, Alejandro; Giannakas, Konstantinos; Pick, Daniel
Publication:Southern Economic Journal
Date:Apr 1, 2011
Words:12494
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