Consumer purchasing decisions and welfare under country of origin. Labelling regulation

Abstract

This study develops a theoretical framework of heterogeneous consumer preferences to examine the effect of voluntary and mandatory country of origin labeling (COOL) on consumer purchasing decisions and welfare when consumers view COOL information as an attribute that differentiates products vertically and horizontally. Analytical results of both the vertically and horizontally differentiated product models show that the change from a no COOL to a mandatory COOL regime decreases (increases) the welfare of consumers with weak (strong) preference for COOL. A change from a no COOL to a voluntary COOL regime leads to an undisputed increase in consumer welfare which results from an increase in the welfare of consumers with strong preference for COOL, while the welfare of consumers with weak preference for COOL remains unchanged. A change from a voluntary to a mandatory COOL regime leads to a consumer welfare loss in the vertically differentiated product model and in the horizontally differentiated product model when product relocation is prohibitively costly. In both the above models, a switch from voluntary to mandatory COOL decreases the welfare of consumer with weak preference for COOL, while it keeps the welfare of consumers with strong preference for COOL unchanged. A change from a voluntary to a mandatory COOL regime in the horizontally differentiated product market when product relocation is possible leads to a decrease in the welfare of consumer with both weak and strong preference for COOL and to possible welfare gains for those consumers who place greater value in country of origin information under mandatory than under voluntary COOL.