Coexistence of GMO production, labeling policies, and strategic firm interaction

This dissertation analyzes the market effects of the coexistence of genetically modified organism (GMO) and conventional production, labeling policies, and strategic firm interactions through vertical product differentiation. Although we focus on GMOs, the applied frameworks can be adopted and extended to other differentiated products where similar concepts apply. The main body of the dissertation consists of four chapters. In the first chapter, we estimate the perceived costs of legal requirements (‘coexistence measures’) for growing genetically modified (GM) Bt maize in Germany using a choice experiment. The costs of the evaluated ex-ante and ex-post coexistence measures range from zero to more than 300 euros per hectare per measure, and most of them are greater than the extra revenue the farmers in our survey expect from growing Bt maize or than the estimates in the literature. The cost estimates for temporal separation, which were the highest in our evaluation, imply that the exclusion of this measure in Germany is justified. The costliest measures that are currently applied in Germany are joint and strict liability for all damages. Our results further show that neighbors do not cause a problem and that opportunities for reducing costs through agreements with them exist. Finally, we find that farmers’ attitudes toward genetically modified crops affect the probability of adoption of Bt maize. Our results imply that strict liability will deter the cultivation of Bt maize in Germany unless liability issues can be addressed through other means, for example, through neighbor agreements. The coexistence costs have implications for the supply of products in which GMOs are excluded from the production process (i.e., non-GM labeling). This is the topic of the second chapter. In that chapter, we discuss and illustrate the complexity of non-GM food labeling in Germany. We show how a multi-stakeholder organization that sets a voluntary private production and certification standard can combine the opposing and agreeing interests of its members. This cohesion reduces the fears of retailers of NGO pressure in the case of mislabeling. Whereas non-GM labeling in Germany started as a niche for farmer-to-consumer direct marketing and small processors, it was further driven by anti-GMO organizations. Today, retail chains label some of their store brands and are now the drivers. We also discuss how informing consumers through non-GM labeling addresses imperfect information, but at the same time, can create new information imperfections if consumers are not well informed about the labeling system itself. Non-GM labeling, together with the EU-wide mandatory labeling of GMOs and their requirements on coexistence, have implications for the potential regulation of crops derived by new plant breeding techniques (NPBTs). In the third chapter, we analyze the market and welfare effects of regulating crops derived by NPBTs as genetically modified or conventional products. We consider the mandatory scheme for labeling GM products and a voluntary non-GM scheme for labeling livestock products derived from non-GM feed. We develop a partial equilibrium model that explicitly takes into account both the coexistence costs at the farm level and the segregation and identity preservation costs at the downstream level. By applying the model to EU rapeseed, we find that regulating NPBTs as GM (as compared to non-GM) in combination with mandatory and voluntary labeling increases prices and therefore makes producers better off. We also show that higher coexistence costs make the price increasing effect even stronger. Voluntary non-GM labeling applied to feed makes consumers in this sector overall worse off, but it benefits farmers and rapeseed oil consumers overall as long as segregation costs are low. Consumers of biodiesel and industrial products, such as lubricants produced from GM rapeseed, benefit from high segregation costs. We show that the effects of farm-level coexistence costs largely differ from the effects of downstream market segregation costs. In the last of the four chapters, we consider the effects of market power and analyze the decision of investing in quality updating when high-quality product demand is growing. We model a decision of a duopoly that initially offers a product perceived as lower quality (e.g., GM product) to invest in an emerging high-quality (e.g., labeled non-GM) product. We investigate whether the smaller or the larger firm invests first. Either preemption or a war of attrition can result, depending on demand and cost factors. For each case, we derive the unique Nash equilibrium. We show that a firm’s timing to invest in high-quality production (e.g., implement a voluntary production standard) depends on several factors, such as the difference in firm size between competing firms and the level of vertical differentiation, growth and discount rate, demand parameters, and per-unit production costs. We show that institutions, which set private or public certification standards, can affect firms’ investment in differentiated products because the standard stringency affects the production and compliance costs as well as the level of product differentiation. Hence, through the setting of these standards, private and governmental institutions can impact the market structure as well as the growth of an emerging market. Finally, we discuss policy implications and how an adjustment of the EU-regulatory framework from a process- to a product-based system can make several issues discussed in this thesis problems of the past.