Consumption effects of genetic modification: what if consumers are right?

Abstract

This paper develops a model of differentiated consumers to examine the consumption effects of genetic modification (GM) under alternative labelling regimes and segregation enforcement scenarios. Analytical results show that if consumers perceive GM products as being different than their traditional counterparts, GM affects consumer welfare and, thus, consumption decisions. When the existence of market imperfections in one or more stages of the supply chain prevents the transmission of cost savings associated with the new technology to consumers, GM results in welfare losses for consumers. The analysis shows that the relative welfare ranking of the ‘no labelling’ and ‘mandatory labelling’ regimes depends on: (i) the level of consumer aversion to GM products; (ii) the size of marketing and segregation costs under mandatory labelling; (iii) the share of the GM product in total production; and (iv) the extent to which GM products are incorrectly labelled as non-GM products.