Date Added: May 2010
This paper analyses the economic consequences of labeling in a setting with two vertically related markets. Labeling on the downstream market affects upstream price competition through two effects: a differentiation effect and a ranking effect. The magnitude of these two effects determines who in the supply chain will receive the benefits and who will bear the burden of labeling. For instance, whenever the ranking effect dominates the differentiation effect, the low-quality upstream firm loses from labeling while all downstream actors are individually better off. By decreasing the low quality input price, the label acts then as a subsidy which assures an increase of the downstream market welfare.