Upstream Competition and Downstream Labelling

This paper analyses the impact of labelling in a context where the products come from a rather long supply chain. We consider a case where there is an information problem about the product quality in the downstream part of the chain, but not in the upstream part. We show that the implementation of a label to solve this information problem affects the competition in the upstream part of the chain. In particular, competition may be soften up to a point where both the high and the low quality upstream suppliers both benefit from labelling while all the intermediary producers or final consumers loose from labelling. This result is established on the basis of a simple model with two vertically related markets (a competitive downstream market which is supplied by an upstream duopoly) and where the quality of the output downstream is determined by the quality of the input upstream. This analysis is informative to understand the impact of labelling in different cases concerning the agricultural sector (poultry meat, GMOs).