Economic Aspects of GIs

1. Interregional Workshop on Geographical Indications Ankara, Turkey, April 3 and 4, 2008 Economic Aspects of GIs Esteban Burrone Intellectual Property and Economic Development Division - WIPO

2. Contents • The Economic Rationale for Geographical Indications • Empirical Evidence on GIs and Origin-labeled Products • Evidence on price premia • Impact on rural development • Evidence on GI Governance • Welfare issues • Rent distribution / Cost distribution • Conclusions

3. The Economic Rationale for GIs GIs and trademarks are legal tools that aim to provide valuable information to consumers: • Consumers have limited information on unobservable features of a product prior to purchase (“information asymmetry” between producers and consumers) (Stigler, 1961) (Nelson , 1970) • This may include quality attributes of agrifood products that are valued highly by certain segments of consumers • (eg. flavour, organic, location of production, etc.) • Under conditions of information asymmetry, high quality products may be driven out of the market because they cannot be recognized by consumers (Akerlof, 1970)

4. The Economic Rationale for GIs (2) • Reputation is considered a key mechanism for correcting problems associated with information asymmetry (Shapiro, 1983) • Reputation provides incentives for companies to invest in quality • Trademarks and GIs: • formalize link between producer(s) and a given reputation • tools for signaling quality and reputation to consumers (not the only ones, OECD, 2000) • confer exclusivity and prevent free-riding on such reputation • help to reduce consumer search costs (Landes and Posner, 1987)

5. The Economic Rationale for GIs (3) • Collective strategies such as GIs enable producers to benefit from collective reputation • Consumers lacking information on the reputation of a given firm, may rely on information on reputation of the group (Tirole, 1996). • This may promote economies of scale and enhance access to market by small firms • The directlink between certain product characteristics and the geographical origin adds value for the consumers • Products with a GI label are certified to be from given region and meet pre-determined standards (or product specifications) • Increasing interest from consumers in typical products linked to cultural traditions

6. The Economic Rationale for GIs (4) • GIs and Trademarks can have an impact on price • Products benefiting from high reputation that can be recognized by consumers may carry a premium price (Shapiro) • Segments of consumers are willing to pay higher price for products with certain quality characteristics • Exclusivity provided by trademarks and GIs enable producers to capture the price premium • If collective reputation is positive: GI label can be a powerful tool to signal quality and enable products to benefit from price premium

7. The Economic Rationale for GIs (5) • GI potential for promoting rural development. • Potential positive spillovers from GIs • Potential impact on the local economy as a whole (enhancing access to market; increasing job opportunities; enhancing cohesion among producers; reducing migration from rural areas, etc.) (Gerz and Dupont, 2006, Barjolle and Sylvander, 2002, Rangnekar, 2003) • Indirect effects on other sectors (e.g. tourism industry) • Non-economic effects (e.g. preserving local customs and traditions, helping to preserve cultural identities, etc.)

8. Empirical Evidence on GIs and Origin-Labeled Products

9. Evidence on Price Premia • Variables that may affect the price premium include (Correa, 2002): • Market size • Degree of competition with substitutes • Consumer perceptions about linkages of an indication with product attributes • Demand elasticity

10. Evidence on Price Premia (2) • Available empirical studies conclude that origin can have a strong influence on price. • US wines: origin strong influence on price. “Napa Valley”, on average 61% higher price (Bombrun and Summer, 2003) • Bordeaux: expected quality (or reputation) have more effect than actual quality. Also, price effect very different for different GIs (Landon and Smith, 1998) • Australian wines: origin does affect price. Also, GI protection had led to more regional promotion of wines • Galician veal (Spain): GI designation effective quality signal for high quality products but not for others (also less useful for extremely high-end products) (Loureiro and MCluskey, 2000) • Cheese (Lisbon, Portugal): some segments of consumers more willing to pay price premia for GI cheese than others (Souza Monteiro and Ventura Lucas, 2001) • Italian Olive Oil: region of origin and GI label influences product preference indirectly, i.e. through perceived quality (Van der Lans, 2001)

11. Evidence on Price Premia (3) • Very limited empirical economic evidence from developing countries: • Chilean wine in US market: grape variety and origin are most important variables influencing price (Troncoso Aguirre, 2006) • Specialty Coffees: evidence for premium prices for specialty coffees from certain regions: e.g. Jamaica Blue Mountain, Café de Colombia (Teuber, 2006, HBS, 2004, World Bank (2004)) • Darjeeling: GI protection very modest impact on price but some evidence of improvement on quality (WTO, 2004) • Case study/anecdotal evidence for various other products (Mantecoso Cheese, (Peru); Ceylon tea (Sri Lanka); others)

12. Evidence on Price Premia (4) • Relationship individual vs. collective reputation • Bordeaux: both factors are important and complement each other (Landon and Smith) • Galician Veal: GI strategy useful for high quality products, but not for extremely high-end products, for which individual reputation may be more important • Parma ham and Parmiggiano: consumers predominantly look for consortia’s label (Arfini, 2000) • Camembert cheese: brand seemed to be more important for consumers than GI label (Bonnet and Simoni, 2001)

13. Impact on Rural Development • Few studies have looked at specific links between GIs and rural development, but literature on regional foods shows important effect • Some empirical findings: • Comparison Comte Cheese with neighboring generic cheese: producers in GI-protected region 32% more profitable, provide 5 times more employment per liter of milk and lower rural migration (Gerz and Dupont, 2006) • Comparison of three case studies (UK, IT): outcomes depend significantly on market structure and role of local institutions. Study identified possible advantages and problems of process for establishment of a GI (Tregear et al, 2007)

14. Evidence on GI Governance • Governance structures for GIs have attracted much attention in empirical literature • Key challenges relate to both phases: • Developing a GI (developing product specifications and demarcating the region) • Establishing mechanisms for exclusion/control • Both phases have costs • “Common good” problem: issues of free-riding • Need to strike fine balance between cooperation and competition (Chappuis and Sans, 2000). Imperative for firms to cooperate while developing the standards for the GI as well as to ensure sound management of common good

15. Evidence on GI Governance • Governance structures are extremely diverse for different GIs (Sylvander and Allaire, 2007) • Study of 21 origin-labeled products across 7 countries: effective coordination of the supply chain seems most important factor in the success of origin-labeled products (Barjolle and Sylvander, 2002). • Establishment of a credible/impartial/independent certification agency in charge of management, exclusion and control becomes imperative to overcome “common good problem”. • Risks of over-administration/over-regulation (OECD, 2000)?

16. Evidence on GI Governance • In addition to certification agency, there may be intermediate collective bodies. E.g. the Italian consortia (Belletti et al, 2006): • Voluntary membership • Provide technical assistance to comply with certification • Promotion activity • Role of local institutions varies significantly • Strong involvement of local public institutions may result in looser product specifications (Tregear et al, 2007) • “Regulation of Product Reputation” strategy vs. “Territorial Quality” strategy (Pacciani et al, 2001)

17. Welfare issues • From public policy perspective, important to consider potential welfare impact. • Welfare impact may vary among actors (producers of GI product, producers of non-GI products, consumers) and may depend on (Zago and Pick, 2004): • Characteristics of product • Technology conditions • Degree of market competition • Are there monopolistic effects? Does it create obstacles to market entry? (OECD, 2000)

18. Rent Distribution / Cost Distribution • How are benefits distributed along the supply chain? • Case of Mozzarella di Buffala Campana (De Rosa, 2000) • Size and bargaining power of different actors in the supply chain may affect the added value captured by each group (Tregear et al 2007) • Distribution of costs of certification among actors in supply chain also varies (Belletti et al, 2006) • Depending on product specifications and presence of intermediaries • Vertically: between actors in different phases of supply chain (e.g. Tuscan Olive Oil, certification costs mainly by bottlers) • Horizontally: between different actors in same phase of supply chain (e.g. Tuscan Olive Oil, cheaper fee for small producers) • Indirect costs will also depend on product specifications as well as on individual companies

19. Conclusions • GIs: mechanisms to reduce information asymmetries between buyers and sellers. • With potential impact on rural development • Origin-based labeling strategies may have an impact on price and origin-labeled products may benefit from price premia. This is confirmed by the empirical literature.

20. Conclusions • Importance of coordination within the supply chain and of credible certification agency • From a policy perspective: important to understand the possible effects/benefits/costs for all actors in the supply chain, consumers, as well as producers not entitled to use the GI

21. Thank you