Certification of Origin as a Non-Tariff Barrier

Transcription

1 ECOLE POLYTECHNIQUE CENTRE NATIONAL DE LA RECHERCHE SCIENTIFIQUE Certification of Origin as a Non-Tariff Barrier Caire Camboe Eric Giraud-Héraud Avri 200 Caier n LABORATOIRE D'ECONOMETRIE 1rue Descartes F Paris (33) ttp://ceco.poytecnique.fr/ maito:abecox@poy.poytecnique.fr

2 Certification of Origin as a Non-Tariff Barrier Caire Camboe 1 Eric Giraud-Héraud 2 Avri 200 Caier n Résumé: Cet artice propose d'associer a certification d'origine à une barrière non tarifaire dans es écanges internationaux. En effet, a certification d'origine se traduit souvent à a fois par une restriction quantitative et par une subvention impicite de a quaité. On considère e modèe canonique de concurrence internationae dans eque une firme domestique et une firme étrangère se concurrencent pour a vente de eur produit sur e marcé domestique. Dans ce cadre, on montre comment 'adoption de a certification peut permettre à a firme domestique de se positionner en eader de quaité. Si au contraire ee offre e bien de quaité pus faibe, e surpus des consommateurs peut être améioré. Abstract: Mots cés : Key Words : Tis paper put forward te opinion tat te certification of origin constitutes anoter type of non-tariff barrier. Indeed, certification of origin often combines bot a quantity restriction and a sort of quaity cost subsidy. We consider te canonica mode of strategic trade poicy, wereby two firms are ocated respectivey in te ome country and in a foreign country and are competing on te domestic market. In tis framework, we sow ow certification can aow te domestic firm to position itsef as a ig quaity producer. If, owever, te certified firm offers te ow quaity good, ten consumers' surpus may be improved. Marque, Certification d'origine, Barrière non tarifaire, Commerce internationa Brand, Certification of Origin, Non tariff Barrier, Internationa Trade Cassification JEL: F12, F13 1 Laboratoire d'econométrie Ecoe poytecnique et INRA/LORIA. E-mai : caire.camboe@poytecnique.fr 2 Laboratoire d'econométrie Ecoe poytecnique et INRA/LORIA. E-mai : giraude@poy.poytecnique.fr

3 1 Introduction Internationa trade iterature as devoted a great dea of attention to te effects of various instruments of trade poicy and, in particuar, to non-tariff barriers (NTB). Among tese NTBs, te most frequenty encountered and studied are export subsidies, import quotas, vountary export restraints (VERs) and tecnica barriers to trade.in tis paper, we put forward te opinion tat te certification of origin constitutes anoter type of NTB. Indeed, principay in te agro-food sector, te certification of origin systems are usuay based on te respect of production rues, mainy yied restrictions, as we as te definition of territoria imits outside of wic a producer cannot benefit from te officia certification 1. Taking for granted tat te certification of origin restrains te quantities produced and commerciaized, it may operate ike a VER or an import quota, in te context of internationa trade were some countries resort to certification of origin wie oters do not. However, te certification of origin is not a cassica VER. First, unike wit a VER, it is te domestic firm wic is ere urt by te quantity restrictions, wereasavountaryexportrestraintisaquotaontradeimposedbyteforeigncountry at te request (in genera) of te domestic country. Moreover, more often tan not (and particuary in te agro-food sector), a certification of origin provides a certain eve of reputation or a guarantee of quaity. Te certification of origin is tus aso a kind of cost 1 For instance, in te wine-growing sector it is not rare tat tese certifications of origin specify, in addition, a imitation of te production of grapes (as is te case of te Frenc Appeations d Origine Contrôées abeing, or more generay te European Quaity Wines Produced in a Determined Region ). Tis is aso found for ceeses wit te definition of te breed of anima designated to produce te mik. It is te same for te quaity abes in te meat sector wic very severey restrict te producers on te number of animas per ectare tat tey ave and tese restrictions are often muc more costy tan investments in fixed or variabe costs to satisfy production specification requirements. Te oter poe in te production system and te marketing of te agro-food sector (and especiay for wine) is tat wic can be observed today in newy exporting countries suc as te United States, Austraia, or Cie. Here it concerns a more industriaized form of wine growing based on a simpified identification of te product variety (for exampe te type of vine) and on private brands. Te often significant promotiona investments are essentiay associated wit tese brands (as an exampe, te Gao firm in te United States as te biggest advertising budget of te entire profession wit 30 biion doars invested eac year, see Bastien (1997)). 2

4 subsidy tat modifies a firm squaityinvestmentsandinturntequantityofteproduct offered. Tus, a partia but noneteess reevant interpretation is tat certification of origin may constitute a new type of NTB combining bot a quantity restriction and a sort of quaity cost subsidy. Tis interpretation is rater origina, since in te iterature certification scemes are usuay regarded as quaity abes used by te State as a mean to correct market faiures wic are induced by te consumers ack of information about a products quaity. Most of te teoretica works in tis fied compare te effectiveness of private and/or pubic signas wit respect to information reveation from te point of view of pubic economics (Sapiro (1983)). In contrast, even toug we agree tat information reveation is an importantissue,ouranaysisdoesnotingeontisfactor. Our approac to te probem fas witin te framework of te internationa trade iterature. Our work is reated to recent papers on internationa trade, wic argey focus on te anaysis of te effects of quantitative restraints suc as import quotas or vountary export restraints. More precisey, our mode is cose to te works of Krisna (1990), Das and Donnenfed (1987), Herguera Kuja and Petrakis (2000) 2, wo anayze te impact of import quota imposition or vountary export restrictions on quaity coice in an internationa competition setting. We consider te canonica mode of strategic trade poicy, wereby two firms are ocated respectivey in te ome country and in a foreign country and are competing on te domestic market. Te main questions we ask in tis paper are : under wic conditions woud te domestic producer vountariy coose certification? To wat extent wi te certification strategy benefit or on te contrary urt consumers surpus? We assume tat ony te domestic firm can opt for certification, since a abeing organism exists in te ome country and not in te foreign country 3. Te under study game is tus te foowing: once te domestic firm as taken its decision about certification (i.e., weter it is certified or not), te two rivas first coose teir quaities and ten 2 See aso Boccard and Wauty (2000). 3 Accordingtofootnote1, tis assumption is reaistic especiay in te wine sector wit te competition between te european system of certification and te newy exporting countries (see aso Camboe and Giraud-Héraud (2003)). 3

5 compete in quantities. In our paper, te certification of origin as, troug te quantity restriction, a direct impact on quantities excanged, and an indirect impact on firms quaity coice. Furtermore, te reputation resuting from te certification as a direct impact on products quaities. In tis framework, we sow ow certification can aow te domestic firm to position itsef as a ig quaity producer. If, owever, te certified firm offers te ow quaity good, ten consumers surpus may be improved, tis equiibrium corresponding to a ower product differentiation and tus a fiercer competition. Te next section presents te genera assumptions of our mode. In section 2, weaso deveop te bencmark mode were te domestic firm refuses certification. We ten identify te conditions for equiibrium under wic te domestic firm cooses to adopt te certification of origin wie its riva is not certified in section 3. Tisisfoowedby section, wic compares te resuts in terms of individua profitabiity for te domestic firm, quaities of goods deivered on te market and consumers surpus. Section 5 concudes. 2 Te mode 2.1 Suppy Let us consider te canonica mode of strategic trade poicy, were two firms are ocated respectivey in te ome country and in a foreign country and are competing on te domestic market. Te firms offer goods differing in quaity on te domestic market of a normaized size as 1. As we ave aready mentioned, for istorica or cutura reasons, tere exists in te domestic country an institution controing te certification of origin process from its definition to its attribution wie te foreign country does not ave suc an institution. Tus, in our mode, ony te domestic firm can adopt te certification. We wi reax tis assumption in section 6. If te domestic firm becomes certified, it commits itsef to imiting its production to aevez in excange for te certification. In return for te restriction in capacity z to wic it assents, te certified firm benefits immediatey from a minima quaity eve s (s 0). Tis exogenous s parameter refects ere te consumer satisfaction wit suc

6 acertification system. If te domestic firm is not certified, ten it cooses a traditiona brand strategy. A brand firm is ten free to suppy a te demand, but as no advantage for quaity at te start. Watever te cosen strategy be, te firms can make investments to improve teir quaity in reation to teir initia quaity (respectivey, s for a certified firm or 0 for a brand firm). Tese investments can represent tecnica innovation costs aowing for te objective improvement of te quaity of te goods, as we as costs of brand promotion wic contribute to improving te image and te reputation of te product. In tese two exampes, te entaied expenses are most often independent from te quantities produced, we terefore assume tat a firm aving adopted te brand strategy and wises to reac a quaity k as a fixed cost for quaity : F (k) = 1 2 k2 (1) If a firm aderes to a certification system, te investment cost spent to reac a quaity eve k>sis : F (k) = 1 2 (k s)2 (2) Assownintefigure 1 beow, te amounts invested to reac a given quaity eve k are given for eac type of firm. Quaity Cost F(k) (1) Cost witout certification F(k) (2) Cost wit certification s k Quaity eve k Figure 1: Cost structure wit and witout certification Differing from te oter form of quaity costs, namey variabe costs (see for exampe Motta (1993). 5

7 Te two curves (1) and (2) in figure 1 correspond respectivey to te two strategies wic te domestic firm can adopt. For any quaity eve k, te brand strategy is more expensive tan te certification strategy in terms of investment spendings, te compensation being tat te producer is imited in te quantity put on te market. Te margina cost of quaity improvement is equay ess wen te firm is certified. Tis is an important assumption of our mode. Te main expanation ying beind tis assumption is tat tere are synergies between bot types of investments: te promotion and reputation of te brand, investments are reativey ess costy wen combined wit acertification of origin, wic constitutes a kind of officia quaity guarantee Demand Consumers are distinguised by a taste parameter θ wic expresses te intensity of an individua s preferences for quaity. Te one dimensiona parameter θ is uniformy distributed over an interva [0, 1]. We assume tat eac consumer buy zero or one unity of goods. Te surpus S j (θ) tat an individua wit te taste parameter θ redeems from quaity k j good s purcase, is given as: S j (θ) =θk j p j,j=,. Tis formuation comes from Mussa and Rosen (1978) and expresses te surpus of te consumer as te difference between a reservation price and te purcase price p j. Te reationsip between te reservation price and te quaity is inear and depends on te taste parameter θ. Tus te quaity k j,sodatpricep j cannot be bougt by a type θ consumer except insofar as S j (θ) > 0, so tat te market is not totay covered by incumbent firms. Of course, we assume tat consumers know perfecty te quaity of te good, tis atter being made up of bot intrinsic quaity and reputation. Te consumption of eac good depends on te quaities offered and on te prices set on te market. In te same way, wen two products of quaities k and k,witk <k, prices wen quantities q and q of eac quaity good are sod are written: 5 Anoter pysica expanation coud be tat a certified firm respecting a capacity constraint wi get a better raw materia and tus wi reac a better quaity of food product troug a given eve of researc and tecnoogica investments. 6

8 p = k (1 q q ) (3) p = k k q k q Tus, te genera expression of profit reaized by a quaity k i good producer is: π i = p i (q i,q j6=i ) q i F (k i ) were i =, () were F (k i ) is respectivey defined by (2) or (1) according to weter te domestic firm is certified or not. 2.3 Te bencmark mode Tecaseweretedomesticfirm as not adopted te certification system, namey te free trade situation, can be represented by a two stage game were te firms first reaize teir investments in quaity and ten compete in quantity in te absence of capacity constraints. Te equiibrium quaities, quantities and profits of tis game were obtained by Motta (1993) andaregivenintabe1. Teexponentb remindsustatweareinte particuar free trade case were bot firms ave a brand strategy. Tabe 1 : Perfect equiibrium of te duopoy k b =0.09 k b =0.252 q b =0.275 q b =0.51 π b = πb = Te consumers surpus and te wefare (sum of te surpuses of consumers and producers) respectivey denoted SC b and W b are : SC b ' 0.002, W b ' At te equiibrium, te product differentiation eve is measured by µ b = kb k b ' Furtermore, te quantity of ig quaity goods produced is greater tan te quantity of goods offered on te ow quaity segment 6.Sincetefirms are perfecty symmetrica 6 However, if we introduce te variabe quaity costs, tese costs woud ead to a ower quantity of ig quaity goods, wose production becomes reativey more expensive, being put on te market in reation to ow quaity goods. Consequenty, te surpus of te consumers is aways iger wit a fixed quaity cost rater tan a variabe cost. Indeed, te atter is maxima wen a te quantity produced is paced on te ig quaity market. 7

9 at te start, two perfect equiibria exist: one for wic a firm offers te ow quaity good and one for wic te same firm offers te ig quaity one. Te ig quaity good producer s profit is aways iger tan tat of te ow quaity good producer but eac firm as ony a probabiity 1 to be te ig quaity good producer. 2 3 Certification In tis section, te domestic firm is certified wie te oter adopts a brand strategy. We first caracterize bot types of equiibria, were te certified (domestic) firm is te ower (section 3.1) and te iger ( section 3.2) quaity good producer. Ten we find out te conditions for aving eac type of equiibrium (section 3.3). 3.1 Te domestic firm offers te ow quaity good We denote cb te situation of competition between a certified (domestic) firm c offering te ow quaity good and a foreign firm competing wit its brand b offering te ig quaity good. At te second stage, te objectives for te two firms differ ere since te certified firm must respect te production capacity restriction z in order to benefit from a certified quaity eve s. We assume tat te parameter s remains inferior to te eve of te ig quaity good in te free trade case s 0, 1 (given tat k b =0, 252) 7. Furtermore, we assume tat te capacity restriction is aways compeing, by considering tat z 0, 1. Tis condition is enoug to insure tat te certified firm wi aways be ex post restricted weter it be of ig quaity or ow quaity. Te firms coose teir quantities for eac pair of quaities (k,k ) by maximising teir profits π cb quantities cosen at te equiibrium are: and π cb.te q cb q cb = z (1 µz) = 2 Te quaities are cosen by te firms to maximize teir respective profits. By repacing te equiibrium quantities above and after a few anaytica cacuations, we define 7 Infact,aswewisow,assoonass is above 1, resuts are constant watever te vaue of z. (5) 8

10 equiibria of type cb for a of te parameter vaues (z,s). Tese perfect equiibria, wen tey exist are caracterised by te foowing (5), (6) and (7): ³ cb2 µ cb 1 z 2 µ k cb = ³1 cb2 z 2 µ k cb = were µ cb is te soution to te equation : (6) s = s cb (z,µ) = 1 1 z 2 µ z 2 µ 3 2z (1 2z) (7) However, a firstganceats cb (z,µ) properties is meaningfu. Watever µ [0, 1] and z 0, 1, s cb (z,µ) is a stricty increasing function in µ and decreasing in z. Consequenty, at a given eve of certification s, µ cb decreases wen te capacity restriction becomes more restrictive (z decreases). In oter words, te differentiation of product rises wen te capacity restriction becomes stricter wie keeping te rigt to an uncanged eve of certification s. Indeed, te brand firm wic produces ig quaity goods is ten prompted to increase its quaity wereas te certified firm is infuenced to reduce its quaity. Tis effect of te capacity restriction is someow a weat-effect, since te potentia profits of te certified firm decrease wen z decreases, wereas tose of te competing brand firm increase 8 boosting its investments. Now considering te eve of capacity restriction z as fixed, te domestic producer is aways encouraged to increase its quaity wereas its foreign competitor decreases it wen certification eve s increases; tus te differentiation of products decreases. In fact, te more te certification eve increases te more te domestic firm can reac a ig quaity for a smaer investment. On te oter and, s dissuades te foreign firm from investing in quaity. Tis is a paradoxica effect because wen s increases, te certified firm increases its quaity, wit te resut tat te ig quaity firm coud, in order to maintain a sufficient product differentiation, aso ave incentives to raise its 8 Tese resuts agree wit Herguera et a.(2000), wo examined te impact of an import quota on te quaity coices of te two firms. 9

11 quaity eve. Tis resut, as we wi sow in te section.2, aso resuts from interesting strategic effects between firms. 3.2 Te domestic firm offers te ig quaity good We now turn to determining te bc equiibrium for wic te domestic firm offers te ig quaity good. Te quantity produced by te ig quaity certified firm is imited by te capacity restriction. Te equiibrium quantities are: q bc (1 z) = 2 (8) q bc = z We notice tat te quantity equiibrium does not depend on te quaity eves k and k cosen by te firms wen te ig quaity is restricted by z. By repacing te equiibrium quantities above, maximizing te profits eads to te foowing quaities: k bc (1 z)2 = (9) k bc = s +(1 z) z In tis situation, we easiy sow tat wit s fixed, wen z decreases te product differentiation is owered. More precisey, te quaity cosen by te certified firm is ower wereas te quaity cosen by te brand firm increases. Once again tese resuts are connected to a weat-effect and agree wit tose of Herguera and a (2000). Furtermore, wit a fixed capacity constraint, an increase of te certification eve s aows te certified firm to improve its quaity witout invoving any cange in te quaity of its riva. Te differentiation of te products terefore increases. Tere again, we woud expect tat, facing an increase in te domestic firm s quaity, te brand foreign competitor woud reduce its investment in quaity. Tis paradoxica effect directy ensues from te independence between te quantities and te quaities of te cosen equiibrium. 3.3 Conditions for existence of equiibrium Weareabetoproveteexistenceandtocaracterizeateequiibriaoftegamein wic te domestic firm cooses te certification namey to determine te condition for 10

12 aving a cb and a bc type equiibria. In order to prove te existence of tese equiibria, it is necessary to verify tat one of te two firms doesn t ave any interest in deviating by eapfrogging in quaities 9. Contrary to te cases studied in te preceding section, te two equiibria no onger aways appear simutaneousy. Hence, for certain parameter vaues, ony one perfect equiibrium exists, wereas, for te intermediary vaues of z and s, te two equiibria co-exist. Te foowing proposition reviews te situation on tese resuts: Proposition 1: Acertification system being defined by a pair of parameters (z, s) 0, 1 2, tere exist two functions f(z) and g(z) bot decreasing in z wit f(z) >g(z) andsuctat: *wens > f(z), te bc equiibrium is te ony sub-game perfect equiibrium. *wens < g(z), tecb equiibrium is te ony sub-game perfect equiibrium. *weng(z) s f (z), bot sub-game perfect equiibria cb and bc exist. Te foowing figure iustrates proposition 1 in pan (z,s) : S 0 Equiibrium bc Equiibrium cb 0,25 f(z) g(z) z Figure 2: Configuration of cb and bc equiibria 9 By eapfrogging we mean tat one producer coosing its quaity so as to maximize its profit of te ower (resp.iger) quaity producer may ave an interest in investing in a iger (resp. ower) quaity eve tan its riva. 11

13 In te above figure, wen s>f(z), te ony equiibrium wic emerges is te one were te domestic firm produces te ig quaity good. Indeed, assume we are in an equiibrium situation were te domestic firm offers te ow quaity good, and et us considere tat s becomes iger tan f (z) :te quaity granted to te certification system s is ig enoug compared to a ess compeing capacity restriction, so tat it becomes too expensive for te foreign firm to offer te igest quaity. It is ten in its interest to eapfrog wit ow quaity, tat is, to offer an inferior quaity tan tat of its competitor. Inversey, assume we are in an equiibrium situation were te domestic firm offers te ig quaity good, wen s becomes inferior to g (z), te capacity restriction te domestic firm as to respect is reativey strong in reation to te eve of quaity s guaranteed by te certification system, so tat te foreign firm as an incentive to produce a iger quaity tan te certified firm. As mentioned in section 2.3, standard duopoy modes of vertica differentiation exibit two perfect equiibria in pure strategies. We sowed ere tat te coice of an appropriate certification system (z, s) can ead to seect a singe perfect equiibrium. Noneteess, being te producer of te ig quaity good is not a guarantee for obtaining te best profit. Te reason wy being te ig quaity producer is not a guarantee for making te best profit is tat a capacity restriction z ess tan 1 is muc more restrictive for a ig quaity firm wic, in te absence of a capacity restriction, woud offer a greater quantity of te good, tan for a ow quaity firm. Terefore, te coice of a particuar certification system (z,s) can aso insure te best profit for te domestic firm but not necessariy in impementing te bc type equiibrium. However, an unappropriate coice (z,s) may aso impede te domestic firm to reaize a better profit tantatofits competitor, or to position itsef as te ig quaity producer wie it woud be profitabe. Comparative statics: certification vs. free trade We now compare te profits granted to te domestic firm in case it certifies wit tose of free trade. We first determine te conditions under wic te domestic firm cooses te certification. In te foowing sub-section we point out te infuence of te domestic firm certification on consumers surpus. 12

14 .1 Certification and profits Even if a certification system exists, te request for certification is ere a matter of a private decision on te part of te producer. We are ooking for conditions based on te (z, s) parameters under wic aderence to a certification system woud be profitabe for te domestic firm given tat its foreign riva as a brand strategy. Proposition 2: Tere exist a function φ (z) suc tat, wen s>max[φ (z),f(z)], te domestic firm adopts certification and tus aways offers te ig quaity good. Tere exist a function ϕ (z) suc tat, wen ϕ (z) <s<f(z), te domestic firm adopts certification and tus may be te ig or te ow quaity producer (eac wit a 1 probabiity). 2 Wen s<max[φ (z),f(z)] or s<min[f(z), ϕ (z)] ten, te domestic producer prefers a brand strategy. As represented in figure 3, we can distinguis tree types of answers depending on te eve of te parameters (z,s). S 0,25 C r(z) φ() z A ϕ() z B z 0,25 f(z) g(z) Figure 3: Domestic firm s certification strategy Te tree regions A, B and C are deimited by functions ϕ (z) and φ (z). In zone A, te certification system is too unfavorabe and tus te domestic firm never finds it 13

15 profitabe to certify. Indeed, if s is too ow te domestic firm wi never agree to respect a capacity restriction associated wit certification. On te contrary, in area C, te domestic firm adopts certification. In tis case, coosing a brand strategy, te domestic firm coud be te ig or te ow quaity producer (eac wit a probabiity 1 2 ) wereas coosing te certification, te domestic firm is sure to be te ig quaity good producer. Tis effect reinforces te profitabiity of te certification strategy. However, in region B, te domestic firm once again finds te certification strategy profitabe wie e may be te ow quaity producer at equiibrium wit a probabiity 1. It tus appears tat an 2 equiibrium were te domestic firm cooses te certification strategy and offers te ow quaity product may arise..2 Certification and consumers surpus We now study te infuence of te domestic firm certification on consumers surpus. Larger quantities and better quaities of course benefit te consumers. We obtain te foowing proposition: Proposition 3: Wen te domestic firm cooses certification and offers te ig quaity good ( s g(z)), te consumers surpus is aways weakened in comparison wit te free trade eve. On te oter and, wen te domestic firm cooses te certification and offers te ow quaity good (s f(z)), tere exists a function r(z) f(z) suc tat, if r(z) s f(z), te consumers surpus increases in comparison wit te free trade eve. Te consumers surpus reaces its maximum wen te entire quantity is aocated on te ig quaity market. Finay, wen te quantity aocated on te ig quaity good market is restricted by te certification system, te capacity restriction is reativey more prejudicia to consumers tan wen it restricts te quantity aocated on te ow quaity good market. Tis negative effect reated to quantities aways prevais even over an improvement of te quaity induced by certification. Let us now anayze te different effects tat may expain te second part of te proposition. Tere are bot quaity and quantity effects. First, te quantity of ow quaity good is reduced and on te contrary, te quantity of ig quaity good increases. 1

16 As we mentionned, at a given tota quantity, tis new aocation of quantities benefits to te consumer s surpus. Neverteess, te capacity restriction eads to a goba drop in tota quantities of products sod on te market wic urts te consumer surpus. Wen te domestic firm cooses certification and offers te ow quaity good, te domestic firm benefits from te certification system and tus as a iger incentive to invest in quaity. Tus te quaity eve of te ow quaity good is iger tanks to certification. On te contrary, because te domestic firm is constrained in quantity, te foreign firm as a smaer incentive to invest in quaity since te capacity provokes a rigidity in terms of te oss of demand incured in case of a essening of quaity 10.Tustequaityeveofte ig quaity good decreases tanks to certification. Finay, wen r(z) s f(z), te product differentiation is sma and te positive effect due to te increase in te quaity eve of te ow quaity product prevais over te damaging effects of bot te capacity restriction and te owering in quaity of te ig quaity product. Te consumers surpus is terefore improved. Tis resut according to wic te consumers surpus may be iger tan in free trade, wen te domestic firm cooses te certification and offers te ow quaity good was unexpected. 5 Concusion Tis paper as proposed a formaization of te certification as a non-tariff barrier. In our mode, we ave assumed tat te certification system is exogenous from te producer s point of view, and we ave anayzed its impications in terms of profit for te domestic firm tat adopts it as we as its impication wit products quaity and consumers surpus. We ave sown ow a certification system based on a quantitative restriction and initiay designed in order to promote te quaity of products and to protect consumers, may be a weapon in internationa trade wen te riva country uses a traditiona brand strategy. In particuar, we sow ow te adoption of certification may be used by a domestic firm to seect te equiibrium simpy for individua profit improvement prospects wic may be in contradiction wit its initia objectives of products quaity upgrading. 10 Indeed, wen te foreign firm s quaity essens, te consumers wo woud ike to turn to te ow quaity good cannot do so because te quantity offered is restricted. 15

17 In reaity, it appears trougout te mode tat te ony way to improve te consumers surpus is to promote an equiibrium wic is not too restrictive on te quantitative eve suc tat te certified firm positions itsef on te ow quaity segment. Tis equiibrium corresponds paradoxicay to a situation were te products are sigty differentiated (te ig quaity good as a worse quaity, and te ow quaity good a better quaity) in reation to tat wic woud prevai at free trade. Concerning extensions, we beeive tat simiar resuts coud aso be obtained wen firms compete in price. In particuar, Boccard and Wauty (2000) sowed in a Bertrand competition mode, tat imposing a quota on a foreign firm coud aow te domestic firm to seect te equiibrium and become a eader in quaity. More interesting, we ave approaced a new game were at te first stage bot te domestic and te foreign firms coud coose to adopt te certification. Te anaysis was ed assuming tat in te two countries te certification system (z,s) were identica. Noneteess, we coudn t provide a woe anaytica soution giving te equiibrium configuration of tat game. However, we were abe to prove 11 tat tere exists some certifications systems (z,s), suctat te ony equiibrium of te game is asymetric: one producer cooses te certification wie its riva cooses a brand strategy. Tis resut comforts us in te opinion tat te situation anaysed in tis paper may be endogenized. 11 See te ast part of te appendix. 16

18 References [1] Bastien, P. (1997), L industrie Caifornienne du Vin: E&J Gao et R. Mondavi, deux anayses stratégiques, Les notes d expansion économique, Direction des reations économiques extérieures, poste d expansion économique de San Francisco, 2 p. [2] Boccard, N. and Wauty, X., (2000), Enforcing Quaity Leapfrogging troug Quotas,WorkingPaper,CORE,UCL,Begium. [3] Camboe, C., Giraud-Héraud, E. (2003), Economic anaysis of certification by an AOC, in Gatti, S., Giraud-Héraud, E., Mii, S. (eds), Wine in te Od Word: New Risks and Opportunities, October 2003, FrancoAngei, 20p., pp [] Das, S. and Donnenfed, S.(1987), Trade poicy and its impact on quaity of imports, Journa of Internationa Economics, 23, [5] Herguera, I., P., Kuja., and E. Petrakis, (2000), Quantity restrictions and endogeneous quaity coice, Internationa Journa of Industria Organization, 18, pp [6] Krisna, K. (1990), Protection and te product ine : monopoy and product quaity, Internationa Economic Review, 31, [7] Motta, M. (1993), Endogeneous quaity coice : price vs. Quantity competition, Te Journa of Industria Economics, 2, pp [8] Mussa, M. et Rosen, S. (1982), Monopoy and product quaity, Journa of Economic Teory, 18 : [9] Sapiro.C (1983), Premiums for ig quaity products as returns to reputations, Quatery Journa of Economics, XCVIII,

19 6 Appendix Caracterisation of cb equiibrium Firstwedemonstratetats cb (z, µ) define by (7) is encreasing in µ and decreasing in z. We ave scb (z,µ) =(1 z 2 ) 3z 2 µ 2 wic is decreasing in z. For z = 1 µ, s cb ( 1,µ ) = 3 µ 1 1 µ > 0. So scb (z,µ) > 0 watever µ [0, 1]. In te same way, µ s cb (z,µ) z = z ( µ µ 3 ) 1 wic is stricty descreasing in µ. scb (z,0) z < 0 since z< 1, so s(z,µ) < 0, watever µ [0, 1] and z 0, 1 z. Second, we demonstrate tat s = s cb (z,µ) defines a unique µ [0, 1] for a given (z, s). In order to simpify tis tecnica anaysis, we can take a dua probem giving te vaue of s for given vaues of (z,µ) [0, 1 ] [0, 1]. Note tat for a z [0, 1 ] we ave s cb (z,0) < 0 and 0 <s cb (z,1) < 1. Hence, since scb (z,µ) is encreasing in µ,tere aways exists a unique bµ(z) ]0, 1[ suc tat for a µ [bµ(z), 1], tere exists a unique s suc tat s = s cb (z,µ). Tis argument demonstrates tat for a z [0, 1 ] and for a s [0,scb (z,1)],tere exists a unique µ [0, 1] suc tat s [0,s cb (z, µ)]. Ten,wenotetats cb (z, 1) tends towards 1 as z tends towards 0. Hence, for a (z,s) [0, 1 ] [0, 1 ], tere exists a unique µ suc tat s = s cb (z, µ). π cb π bc Equiibrium profits Using (5) and (6) we sow tat, at te cb equiibrium, te profits are given by = kcb 1 µ cb z 2 (kcb )2 and π cb = kcb k cb s 2 z[1 z (2 µ)] Using (8) and (9) we sow tat, at te bc equiibrium, te profits are given by = 1 8 z (1 z)(8s 1+6z 5z2 ) and π bc = 1 32 (1 z). Existence of cb equiibrium For te cb equiibrium, tere is eapfrog from te brand firm if and ony if tere exists k 0 <k cb suc tat π eap (k 0 ) > π cb quantity competition. were πeap (k 0 ) is te equiibrium profit in te subgame To define te eapfrog profit π eap (k 0 ) we need to find te eapfrog quantity q eap and te optima quaity k 0 = k eap of eapfrog. Since te brand firm becomes te ower quaity producer, we fa in a situation of type bc. Ten q eap (1 z) 2 and π eap (k eap )=π bc = q bc = (1 z) 32.Now,etC 1 (z, µ) be suc tat: 18 = (1 z),k eap 2 = k bc =

20 C 1 (z,µ) =(1 z) (1 µz) 2 (1 + µz)(1 3µz) Wen µ cb is te soution of (7), we ave π eap (k eap ) > π cb if and ony if C 1(z,µ cb ) > 0. C 1 (z,µ) is a function defined and continuous over ]0, 1 [ ]0, 1[ and is differentiabe wit respect to µ. Moreover, we ave C 1(z,µ) =z(1 zµ)(1 3z 2 µ 2 ). Since z 2 µ 2 < 1 ( µ 3 z< 1 and µ<1), we ave C 1(z,µ) > 0. Tus, for a z µ 0 ]0, 1[,C 1(z 0,µ) increases in µ. We aso ave C 1 (z 0, 0) = (1 z 0 ) 1 < 0 and C 1 (z 0, 1) = z 0 (1 z 0 ) 2 > 0. Hence, for a z 0 ]0, 1 [, tere exists a unique µ 0 ]0, 1[ suc tat C 1 (z 0,µ 0 )=0.Giventeimpicit function teorem, tere exists a function µ (z) define in te neigbourood of (z 0,µ 0 ) suc tat µ(z 0 )=µ 0 and C 1 (z,µ(z)) = 0. Moreover, we ave: µ 0 (z) = C 1 (z,µ) z C 1 (z,µ) α [z,µ(z)] [z,µ(z)] Denote ψ(z,µ) = C 1(z,µ) = (1 z) 3 +µ(1 zµ)(1 3z 2 µ 2 ). We can easiy prove z tat ψ(z,µ) increases as z and µ increase. Terefore we ave ψ(z,µ(z)) < 0 and ten µ 0 (z) > 0 for a z. Tus,µ(z) increases as z increases. Terefore, we ave π eap s = s cb (z,µ), ands cb (z,µ) increases in µ, we ave π eap > π cb if and ony if µcb >µ(z). Since µ cb is suc tat > π cb if and ony if s>f(z) wit f (z) =s cb (z,µ(z)). We ave te foowing derivative of f wit respect to z: f 0 (z) = 1 [ 2+8z 8zµ(z) 2zµ3 (z)+(1 z 2 3z 2 µ 2 (z))µ 0 (z)] < 0 Moreover, wit te arguments given above wit te impicit teorem, we ave 0 < f(z) <s cb (z, 1) (since µ 0 = µ(z 0 ) is suc tat 0 <µ 0 < 1). Consider now te eapfrog from te certified firm. Tis kind of eapfrog coud emerge if and ony if tere exists k 1 > k cb suc tat πeap(k 1 ) > π cb were π eap (k 1 ) is te equiibrium profit in te quantity competition, given te quaities k 1 and k cb = 1 z2 µ 2 (wit µ = µ cb ). Ten we ave te foowing eapfrog profit for te certified firm: π eap (k 1 )=z(1 z)(k 1 kcb ) 1(k s) 2 Terefore k eap = s+z(1 z) defines te potentia optima quaity of eafrog (according to te first order condition of maximisation of π eap (k 1 )). According to µ = µ cb,weobtain te eapfrog profit: 19

21 Let C 2 (z,µ) be suc tat: π eap (k eap )=z(1 z)[s + 1z(1 z) 1(1 2 8 z2 µ 2 )] C 2 (z,µ) =(1+3µ 2 + µ )z 2 ( + µ µ 2 + µ 3 )z 2 +(2 µ 2 )z (1 µ) After some cacuations, we sow tat te condition π eap to C 2 (z, µ cb ) > 0. (k eap ) > π cm is equivaent Now, we can demonstrate tat C 1 (z, µ cb ) > 0 impies C 2 (z,µ cb ) > 0 for a z ]0, 1 [. First, we can verify tat C 1 (z,µ) and C 2 (z,µ) decrease in µ over ]0, 1[. Foraz ]0, 1 [, we ave C 1 (z, 0) < 0 and C 1 (z,1) > 0. Tus,foraz ]0, 1 [ tere exists µ 1 ]0, 1[ suc tat C 1 (z,µ) > 0 if and ony if µ>µ 1. On te oter and, for a z ]0, 1 [ we ave C 2 (z,0) < 0 wie C 2 (z,1) > 0 if and ony if z<z 0 wit z 0 = 2 2 w.1. Tus, for a z z 0 we ave C 2 (z,µ) 0 and for a z<z 0,tereexistsµ 2 ]0, 1[ suc tat C 2 (z,µ) > 0 if and ony if µ>µ 2. In tis case, one can verify µ 2 >µ 1 and te resut given above is demonstrate. Existence of bc equiibrium For te bc equiibrium, tere is eapfrog from te brand firm if tere exists k 1 >k bc suc tat π eap (k 1 ) > π bc were π eap (k 1 ) is te equiibrium profit in te subgame quantity competition (given k bc for te aw quaity and k 1 for te ig quaity one). Let A = z[s + z(1 z)]. Te eapfrogging quantity q 1 is suc tat q 1 = 1 (k 1 A) 2k 1 and we ave p 1 = 1 2 (k 1 A). We ten ave to maximize π 1 = 1 (k 1 A) 2 1 k 1 2 k2 1. Tus, π 1 > 0 if and ony if Γ(A, k 1 )=k k 1(1 2 k 1 ) A 2 > 0. For a given vaue of A, Γ(A, k 1 ) 1 is maximized for k 1 = 1 and we ave Γ(A, 0) < 0 wie 6 im Γ(A, k 1)=. Now, k 1 + we ave Γ(A, k bc)=a2 z [(1 z)(1 3z) s]. Tus, if s>1 (1 z)(1 3z) we ave 2 Γ(A, k bc ) < 0 wie kbc > 1 (since s>1 (1 z)(1 3z)). Tus tere is no eapfrog from 6 te brand firm. On te oter and, for s =0,weaveΓ(A, k bc) > 0. So π 1 (k bc k ) > 0 1 and tere is aways eapfrog from te brand firm. π bc k bc = Tere is eapfrog from te certified firm if tere exists k 0 <k bc suc tat π eap (k 0 ) > were πeap (k 0 ) is te equiibrium profit in te subgame quantity equiibrium (given (1 z)2 for te ig quaity and k 0 for te aw quaity). In tis subgame quantity 20

22 equiibrium, we ave q 0 = z and q 1 = 1 2 (1 k 0 z). Terefore te price of te aw quaity k 1 is suc tat p 0 = k 0 ( 1 2 z + k 0 z) and te profit π 0 = p 0 q 0 1 2k 1 2 (k 0 s) 2 is maximized for k eap 0 = (1 z)2 [2s + z(1 2z)]. One can verifie tatk eap 0 >k bc = 2(1 + z)(1 3z) (1 z)2 if and ony if s> 1 (1 z)(1 3z). So,if s>1 (1 z)(1 3z) tereisnoeapfrogbotforbrand quaity and certified quaity. Hence g(z) exists and g(z) < 1 (1 z)(1 3z). Moreover, tereisawaysnoeapfrofifs> z. One can aso verify tat f(0) = 1 and tat f 0 (z) < 13. Terefore f(z) >g(z). 16 Certification and profits If te domestic firm cooses te brand strategy, its expected profit isπ bb ' Wen s>f(z), te domestic firm gets a better profittrougcertification if π bc if and ony if : s>φ (z) = z(1 z) (5z2 6z +1) > πbb Wen s<g(z), te domestic firm never improves its profit troug certification. We cannot demonstrate tis point in a simpe way. Neverteess, taking into account tat g(z) 1 (1 z +3z2 ) and using matematica one can verify tat π cb is a stricty increasing function in s over [0, 1 (1 z +3z2 )]. Using (7), and taking s = 1 (1 z +3z2 ), we infer te equiibrium vaue of z (µ) and we maximise π cb wit z = z (µ) and s = s cb (z, µ).te maximum vaue of π cb is obtained for µ =0, 733 and ten we ave π cb ' 0, 0090 < π bb. Wen g(z) <s<f(z), te domestic firm stricty improves its profit troug certification if ϕ(z) <s<f(z) were ϕ(z) =s cb (z, bµ (z)) wit bµ (z) soution of 1 2 πcb (z,µ)+ 1 2 π bc (z, µ) πbb =0. Ten we verify tat ϕ(z) is decreasing in z and tat ϕ(0.1) >f(0.1) wie ϕ(0.25) <f(0.25). Tus, tere exists (z, s) suc tat ϕ(z) <s<f(z). We aso ceck tat ϕ(z) >g(z) since g(z) < 1 (1 z +3z2 ). Consumers surpus Te genera expression of surpus wit two quaities is SC(k,k,q,q )= 1 2 [k q 2 + k q 2 +2k q q ]. Ten, for te equiibriums cb and bc, weave: SC cb = 1 8 (1 z2 µ 2 ) µz + µz2 3 µ2 z 2 21

23 SC bc = 1 2 ³ (1 z) 16 + z(1 z)3 + z 3 (1 z)+sz 2 Comparing SC cb wit SC b ' (Motta (1993)), we first define µ suc tat if µ µ,tensc cb SC b. Since parameters (z,s) ave to respect te equiibrium condition (7), we ave µ µ (z) if and ony if s r (z) wit r (z) =s cb (z, µ (z)) decreasing in z. Onceagain,drawingr (z) sow us tat wen z is ig enoug, ϕ(z) r (z) f(z). Comparing SC bc wit SC b,we easiy obtain te foowing condition: SC bc SC b if s r 0 (z) wit r 0 (z) < 0, tuswatever(z,s) 0, we get SC b >SC bc. Extension If te two firms adopt certification (we denote tis situation cc), tey are constrained by z. Tus, we infer equiibrium quaities : k cc k cc π cc = (1 2z) z + s and =(1 z)z + s. Equiibrium profits are tus: πcc = 1 z (1 2z)(2s + z (1 2z)) and 2 = 1 2 z (s (2 z)+z z2 ( 5z)). Since tere are two equiibrium, te expected profit ofonefirm wo cooses to certify wen its riva is certified is: π cc = 1 2 πcc π cc = 1 z (s ( 8z)+z (2 z (8 9z))). Let us now assume tat s>f(z). Comparing π bb to π bc, we sow tat, tere exists P 1 (z) suc tat if s>p 1 (z), te firm best response wen its riva adopts te brand strategy is te certification strategy. Comparing π cc wit π bc, one can verify aso tat tere exists P1(z) 0 suc tat if s>p1(z), 0 tefirm best response wen its riva adopts te certification is te certification strategy. Tus if P 1 (z) <s<p 0 1(z), te firm best response wen its riva is certified is to adopt a brand strategy (since s<p 0 1(z)) and te riva s best response wen tis firm cooses a brand strategy is to remain certified (since s>p 1 (z)). Since wen z<0, 131, P 1 (z) <P 0 1(z), tere exists a subgame perfect equiibrium were one of te two firms cooses to certify wie te oter prefers te brand strategy. 22

24 CAHIERS DU LORIA Année Année C. Camboe et E.Giraud-Héraud E. Giraud-Héraud, L.G. Soer et H. Tanguy L.G. Soer et H. Tanguy C. Caron et J. Laye O. Saupic et H. Tanguy C. Arnaud, E. Giraud-Héraud et A.Hammoudi M. Mainsant et F. Porin R. Green et L. Pierbattisti E. Giraud-Héraud, H. Hammoudi et M. Mokrane M.L. Aain et C. Camboe C. Camboe C. Camboe E. Giraud-Héraud, L. Rouaced, L.G. Soer R. Green, M. Hy R. Green, M. Rodriguez Zuniga et Leandro Pierbattisti E. Giraud-Héraud, J. Maturin, L.G. Soer Certification de a quaité par une AOC : un modèe d anayse. Concurrence internationae dans e secteur viticoe : Que avenir au modèe d Appeation d Origine Contrôée? Le fonctionnement des marcés entre vignobe et négoce dans e secteur des vins AOC : trois études régionaes. Equiibre de Cournot-Nas avec contraintes de capacité : une formue expicite. Infuence de a structure financière sur es coix stratégiques : étude de cas dans industrie du vin. Harmonisation des taxes à a consommation : e cas des boissons acooisées. Les effets des poitiques de promotion sur a fiabiité des outis d évauation des prix de détai. Principaes tendencias de mercado mundia de vinos. Mutiproduct Firm Beavior in a Differentiated Market Les reations entre a grande distribution et ses fournisseurs : bian et imites de trente ans de réguation Stratégies de revente à perte et régementation Faut-i interdire a revente à perte? Standards de quaité minimum et marques de distributeurs : un modèe d'anayse Sécurité aimentaire et traçabiité Goba Market canges and business beavior in te wine sector Quee égitimité à des mécanismes de réguation de offre dans es Appeations d Origine Protégée?

25 C. Camboe, E. Giraud- Héraud S. Poret C. Camboe, E. Giraud- Héraud P. Sans, G. de Fontguyon Certification of Origin as a Non-Tariff Barrier A note on te ocation of te anti-drug aw enforcement poicy Do vertica extension and orizonta mergers interact L industrie de transformatio de a viande en France : Une approce istorique ( ) INRA LORIA 65, Bd de Brandebourg 9205 IVRY Cedex (33) ampenoi@ivry.inra.fr