Geographical Indicators

Daniel PickEconomic Research Service

What is Champagne?

Champagne, a sparkling wine, comes from the Champagne region of France. Champagne has produced sparkling wine since the days of the Roman empire, and still bottles some of the best vintages in the world.

(www.cnn.com/FOOD/specials/1999/champagne)

What is feta cheese?

Feta is a classic and famous Greek curd cheese whose tradition dates back thousands of years. Strictly speaking, real feta cheese is produced exclusively in Greece. (www.greekproducts.com).

What do these commodities have in common?

• Both are associated with a particular region or country…but, these products are produced in other countries as well

• Each has a generic name• The EU proposed a list of GIs

to be protected in the WTO trade negotiations

Today’s discussion

• A closer look at GIs• The economics around GIs• Policies used • Existing studies• Governments’ role

What is a Geographical Indicator (GI)?

“Indicators which identify agood as originating in the territory of a Member, or a region or locality in that Territory, where a given quality, reputation, or other charac- teristic of the good is essentially attributable to its geographical origin”

--Article 22 of the TRIP Agreement

Why the interest in GI?

Geographical indicators provide the opportunity to:

• Differentiate a product• Create market power (financial

opportunity)• Have government policy intervention• Transfer income (rural development)

What is the economic ‘justification’ for GI?The rationale behind GI is:

• Market failure: Consumers can't distinguish between qualities

• Information failure: Consumers are not informed. Suboptimal equilibrium resulting from information failure may be improved through various institutions:

•Warranties•Certification•Signaling and reputation

Three types of goods:

The economic literature differentiates between three types of goods depending on how their quality characteristics are identified:– Search goods– Experience goods– Credence goods

Types of policies

Policies instituted to help consumers identify the quality characteristics of a product:– U.S. Certification– EU PDO and PGI

•Protection of Designations of Origin (PDO)

•Protection of Geographical Indication (PGI)

Types of policies, cont’d

•EU policy to protect specific agricultural commodities

•Protection is based on geographical origin

•Regulation No. 2081/92 on the protection of PGI and PDO

Purpose of Regulation No. 2081/92

• To recognize, protect, and foster trade among Member States of PGI and PDO products to secure higher income for farmers in return for improved quality

• Hundreds of products are covered under this regulation

PDO and PGI brand names by product class

Product type No. %

Cheese 148 25

Meat products 147 25

Fruits, vegetables & cereals 130 22

Fats & olive oils 72 12

Mineral waters 31 5

Beer 15 3

Breads 12 2

Fish 6 1

Other products 34 6

Total 595 100Source: Hayes, Lence, and Stoppa, Agribusiness, Vol 20(3): 269-285 (2001)

Approved PDO and PGI brand names in the EU

France22%

Germany11%

Greece13%

Portugal13%

Spain11%

UK & Other10%

I taly20%

Source: Hayes, Lence, and Stoppa "Farmer-Owned Brands? " Agribusiness , Vol. 20(3): 269-285 (2004).

Existing studies

• Loureiro & McCluskey (2000)– Consumers’ willingness to pay for

PGI labeling– Galician veal in Spain– PGI label effective in high quality meat only

• Bonnet & Simioni (2001)– Consumer response to PDO labeling– Camembert cheese– Consumers do not seem to value

PDO label

Existing studies, cont’d

• Zago & Pick (2004)– The regulation creates two goods– High quality good under the

regulation– Low quality good not included in

the program

Existing studies, cont’d

Results from Zago & Pick:• If administrative costs are high, quality

differences small, and costs differences high then we can obtain negative welfare effects

• With supply restrictions, after the regulation, the higher the quality differences, the larger the negative impact on consumers’ surplus and the larger positive impact on high-quality producers

Existing studies, cont’d

Results from Zago & Pick (cont’d):• Effects of the regulation depend on:

– Difference in quality– Costs of producing the quality– Cost of administration

What is the government role?

Several costs and benefits are associated with labeling policies (Gardner 2003):

• Benefits:– Protection of consumers from low

quality products– Reducing consumers’ search costs– Reduction of sellers’ costs by having

uniform labeling requirements– Gains to producers of ‘high quality’

products

What is the government role? cont’d

• Costs:– Exclusion of ‘low quality’ products– Possible barrier to food innovation– Sellers’ increased costs of labeling– Government costs of implementation– Creation of market power

The bottom line

• The welfare effects of PDO and PGI must be evaluated on a case-by-case

• Providing blanket policy is not necessarily optimal

• Market distortions may be created by the policy