Agrifood safety standards, market power and consumer misperceptions

Transcription

1 Agrifood afety tandard, market power and conumer miperception Eric Giraud-Héraud, Critina Grazia, Abdelhakim Hammoudi INRA and Ecole Polytechnique France; Univerity of Bologna, Italy Contributed Paper prepared for preentation at the 05 th EAAE Seminar International Marketing and International Trade of Quality Food Product, Bologna, Italy, March 8-0, 2007 Copyright 2007 by Eric Giraud-Héraud, Critina Grazia, Abdelhakim Hammoudi. All right reerved. Reader may make verbatim copie of thi document for non-commercial purpoe by any mean, provided that thi copyright notice appear on all uch copie.

2 Agrifood afety tandard, market power and conumer miperception Eric Giraud-Héraud, Critina Grazia 2, Abdelhakim Hammoudi 3 INRA - Ecole Polytechnique, Pari, France; 2 Univerity of Bologna, Italy; 3 INRA and ERMES/Univerité Pari II, France c.grazia@unibo.it Summary Thi paper analyze how the implementation of a food afety tandard affect firm trategic behaviour within the context of a food chain. We provide a formal analyi, which conider that the anitary rik reult from a trong heterogeneity of uptream production condition and the final demand depend on conumer rik etimation (given that conumer may underetimate or, converely, overetimate the anitary rik). We how how downtream (proceing or retailing) firm may be prompted to play a poitive role with repect to food afety, either by electing only the afet uptream producer or by encouraging the improvement of upplier production condition. When the degree of conumer rik miperception i relatively low, then a downtream firm may adopt the latter trategy and increae the marketed quantitie a the food afety tandard i improved. However, we how that the actual contamination rik i not necearily decreaing in the level of the food afety tandard. KEYWORDS: food afety tandard, market power, rik miperception Introduction Over the lat decade, public concern over the afety of food ha increaed a a reult of anitary crii (Mead et al., 999, Roe et al., 2000). A a conequence, increaing food afety regulation ha aried, which cover a broad range of regulatory technique, from public to private and from low interventionit to highly precriptive obligation. On the one hand, public authoritie have tightened food afety legilation and created new control procedure. The claical rationale for government regulation in the rik and environmental area i the preence of externalitie. Indeed, the operation of buine often generate health pollution, water pollution and toxic wate. Health, afety and environmental regulation thu pecify the technological requirement that mut be met or the pollution tandard that cannot be exceeded. Thu, it i well known that the main feature of regulation i that it directly control economic agent behaviour and affect an activity before the externality i generated (ee for example Vicui, Harrington and Vernon, 2005). On the other hand, private ytem and certification program have been implemented by proceor or ditributor, aimed at meeting cutomer expectation in term of food afety. Thee "trategie" are often implemented to repond to higher conumer requirement and are attempt to achieve improved both product afety and quality characteritic (Bazoche et al., 2005, Havinga, 2006, Fulponi, 2006). A it wa noticed by Henon and Cawell (999), there are a lot of argument for coordinating the incentive of public with thoe of private ytem. Moreover, thee author point out that private ytem may act a a mechanim to increae market hare by delivering higher or more dependable quality, but they may act alo to protect current market hare from eroion. In both cae, there are incentive for the adoption of private control by individual operator in the food upply chain and it i well obviou that 35

3 tandard requirement affect the trategic behaviour within the vertical relationhip, between producer and retailer. Given thee premie, the objective of thi paper i to evaluate the impact of afety tandard on the trategic behaviour of economic agent in the context of agri-food chain. We develop our analyi in the framework of the theory of indutrial organization and examine a vertical relationhip, where uptream producer (farmer) have do adopt a proce tandard. Thi proce tandard require a minimum level of equipment which could lead to high invetment by certain producer. We how how the compliance with thi tandard depend alo on the trategic behaviour of the downtream firm, who procee and ditribute the product. Then, with repect to the trategic interaction among the upply chain participant, we highlight ome unexpected effect of thee tandard, namely a poitive effect on the number of producer who accept to adapt their equipment to the tandard. We alo how ome poible pervere effect, namely we point out that the actual contamination rik i not necearily decreaing in the level of tandard. Two main hypothei delimit our framework. At firt, we uppoe that a downtream firm doe not have any poibility to fix it own private norm to reinforce the tandard defined by the public authority, but, converely, completely maintain it trategic flexibility to elect the bet equipped up-tream producer. Secondly, we aume that conumer are informed about the effort that firm exert along the production-commercialization proce, but they may underetimate or, converely, overetimate the anitary rik ariing from economic activitie. The firm thu have to adapt their trategic behaviour by taking into account the foreeeable ditorion on the final market. Background There exit a large wathe of the literature concerning the proce of compliance of firm to the food afety regulation and the effect of food afey tandard on firm trategic behaviour. With repect to the firt iue, Henon and Heaman (998) focue on the proce by which firm comply with food afety regulation and illutrate a model of compliance proce. The author how that firm decide to comply if the perceived marginal benefit of compliance i equal to, or exceed, the perceived marginal cot. However, the deciion whether to commit depend on adaptation cot and repreent a long-term deciion. Thee author alo argue that the compliance deciion i affected by the extent to which firm are aware of cot-benefit relationhip aociated with regulation. Loader and Hobb (999) adree the quetion of firm repone to change in food afety legilation and ugget the neceity for firm to repond rapidly to food afety iue a they directly affect the marketability of product to aure conumer that their product meet afety requirement. Moreover, thee author point out the neceity to take into account the role of vertical relationhip. In fact, they argue that food afety regulation encourage firm to follow an organiational trategy aimed at building cloer upply chain relationhip. In thi pirit, Unnevehr and Jenen (999) how that the ue of mandating HACCP may create incentive for vertical coordination to control food afety throughout The iue of conumer perception of anitary rik ha been examined by everal contribution. See for example, McCarthy and Henon (2005), for an analyi of the major facet of perceived rik for beef among Irih conumer. Yeung and Yee (2002), how that health lo i the mot important component of perceived rik, followed by pycological, financial, time and tate loe. Lobb, Mazzocchi and Traill (2007) ugget a tatitical trategy for explaining how food purchaing intention are influenced by different level of rik perception and trut in food afety information. Cota-Font and Moialo (2007) focu on how individual learn about the rik and benefit of genetically modified (GM) food, along with the influence of information ource on the formation of both rik and benefit perception. See alo Krytalli and Arvanitoyanni (2005) for the analyi of Greek conumer belief, attitude and intention toward GM food product and Roati and Saba (2004) for an analyi of public perception of rik aociated with different food-related hazard and perception of reliability of variou ource providing information on food-related rik. 352

4 the production proce. Moreover, it may poe a greater burden on mall firm, due to the large invetment needed, and thu reult in concentration procee (ee alo Henon and Cawell, 999). Following a quantitative approach, Antle (999) provide an analytical framework for the meaurement of the cot of regulation and dicue the ue and limitation of currently available benefit and cot information for quantitative regulatory impact aement. Indeed, everal contribution examine the economic implication of food afety regulatory tandard uing a cot and benefit analyi (ee for example Cawell and Kleinchmit, 997; Vicui, 2006). Thi cot-benefit reearch attempt to meaure the cot for firm of implementing food afety regulation and compare it to the benefit in term of the reduced ocietal cot of conumer mortality and foodborne illne. With repect to the effect of food afey tandard on firm trategic behaviour, ome contribution have taken into account the dimenion of firm behaviour in the context of vertical relationhip. Thee tudie often refer to a context of moral hazard. Thu, they take into account the opportunitic behaviour of uptream eller, who exploit the fact that many food product characteritic remain uncertain to downtream buyer in the coure of market tranaction. Hence, buyer run the rik to pay a premium price for inferior product or to ue, or conume, ubtance which are harmful (health rik). Incentive ytem mut thu be deigned to induce compliance with pecified regulation and tandard. For an example of thi type of model in the context of food chain, ee Hirchauer (2004), who pecifie the condition at which optimal control intenity and price can be determined. In thi line of reearch, Starbird and Amanor-Boadu (2007) ue a monoponitic pricipal-agent model in the context of advere election to examine how contract that include traceability can be ued to deter unafe producer, within the context of a food chain. They how that the motivation for the proceor to elect againt unafe producer depend on the magnitude of the failure cot and the proportion of them allocated to producer. Furthermore, it i well known in the literature concerning the analyi of afety regulation that a firm engage in externality-creating activitie, then they may derive a profit (or private benefit) from it. They alo may reduce the rik, by exerting precaution effort and upporting the related cot. Thu, the implementation of afety tandard, a a mean of controlling riky activitie, affect firm trategic choice. Neverthele, to our knowledge, a few paper analyze the effect of tandard on firm trategic behaviour. For example, in a recent theoretical paper, Shavell (2007) analyze the effect of the level of legal tandard on the partie level of activity, thi latter repreenting whether or how much a potential injurer engage in a particular (riky) activity. It i hown that overly trict legal tandard may dicourage partie from engaging in ocially deiderable activitie, when tandard are required by the regulatory ytem. Neverthele, the market dimenion (that i, the effect of food afety regulation on firm trategic behaviour in term of quantity and price) i often neglected by thi kind of model. Therefore, the effect of conumer attitude toward a riky product are not taken into account and furthermore, the willingne to pay of conumer for food afety i often ignored. 2 However, in a eminal paper, Polinky and Rogeron (983) have tudied thi iue by fixing, from a theoretical point of view, the bai of the formalization that we propoe at the beginning of our paper. Indeed, thee author argue that introducing the market dimenion require to take into account conumer rik miperception (everal analyi of conumer rik perception within the food ector are provided in the literature; ee for example McCarthy and Henon, 2005, Yeung and Yee, 2002, Lobb, Mazzocchi and Traill, 2 Some model have been ued in order to derive expreion for willingne to pay (WTP) for reduced rik (Harrington, Portney, 987, Cropper, Freeman, 99, Berger et al. 997). Several tudie have hown an increae of conumer WTP for product characterized by a lower rik of contamination (Buzby, Read, Skee, 995, Fox et al., 995). 353

5 2007, Cota-Font and Moialo, 2007, Krytalli and Arvanitoyanni, 2005, Roati and Saba, 2004). A far a market react to the perceived and not to the actual rik, then conumer rik miperception may affect the trategic behaviour of economic agent and thu the deign of the regulation. In thi paper, we how how both the trategic behaviour of firm within the context of vertical relationhip and the conumer rik miperception may influence the effectivene of the food afety regulation. Objective The objective of thi paper i to evaluate the impact of afety tandard on the trategic behaviour of economic agent in agri-food chain. We develop our analyi in the framework of the theory of indutrial organization and tudy the trategic interaction among food chain participant (uptream producer, downtream proceing or retailing firm, final conumer), when the anitary rik reult from the uptream production condition. For thi purpoe, we tudy a vertical relationhip where uptream producer (farmer) have do adopt a proce tandard. Thi tandard require a minimum level of equipment which could lead to high invetment by certain producer. We conider that the downtream firm doe not have any poibility to fix it own private norm to reinforce the tandard defined by the public authority, but, converely, completely maintain it trategic flexibility to elect the bet equipped uptream producer. Moreover, conumer are uppoed to be informed about the effort that firm exert along the production-commercialization proce, but they may underetimate or, converely, overetimate the anitary rik ariing from the economic activitie. Thu, the final demand depend on conumer rik etimation. Methodology Statement of the formalization We conider a vertical relationhip between J uptream producer and one downtream retailer. Following Giraud-Héraud, Hammoudi and Soler (2006), the uptream producer are differentiated according to their equipment level, which i repreented by a onedimenional parameter e, aumed to be uniformly ditributed within the interval [0,], according to the denity function f(e). Each of the uptream producer can offer one unit of the good in the intermediary market. However, thi unit i more or le riky, according to the equipment level of the producer. Thu, the contamination rik reult from uptream production condition. The contamination rik ariing from each individual producer, whoe equipment level i e, i given by σ (e), where σ (.) i a decreaing function of e. For the ake of implicity, we conider that σ (e) = e. We then have σ (0) = and σ () = 0. Hence, the rik i certain with a producer characterized by the minimum level of equipment and null with a producer characterized by the maximum level of equipment. A we conider that each producer alway upplie the ame quantity of product (non-elatic individual upply), the contamination rik i given by: σ = σ(e)f(e)de= () 0 2 We conider that σ define the probability of crii in the end market. Thi initial probability can be modified if at leat one of the producer change hi equipment over the coure of time. Then, the denity f(e) will hift to a denity f (e) and change the level of σ given by (). We will refer toσ a the contamination rik in the ret of thi paper. 354

6 We uppoe that, in order to enter the intermediary market, an uptream producer mut, at leat, reach a certain level of equipment e, which correpond to the food afety tandard implemented in the elected market. We aume that the fixed cot for each producer of type e, who want to participate in the intermediary market with a level of tandard e, take a linear form Max{ 0,e e }. Then, each producer i aumed to be price taker in hi deciion to enter or not the intermediary market. In the end market, conumer are identical and rik neutral. Let σ be the true probability of crii in the end market. Following Polinky and Rogeron (983), we define by ( ) σ each conumer' perception of σ, where. Since larger value of correpond to lower etimate of the contamination rik, may be interpreted a a meaure of the extent of the conumer rik miperception. Three repreentative degree of conumer rik miperception are identified: = + (maximal underetimation 3 ), = 0 (no miperception) or = (overetimation) 4. Then, the aggregate invere demand for the product, when the rik perception i ( ) σ i given by: p = β( α,, σ ) x with (2) β ( α,, σ ) = α ( ) σl Equation (2) conider that the maximum level of price β ( α,, σ ) which conumer are willing to pay, that we denote conumer reervation price, depend both on the actual level of rik and on the degree of conumer rik miperception. The parameter l repreent the monetary lo for conumer for each unit of the product which i contaminated. The quantity x i bought by the monoponit in the intermediary market and upplied to the end market. We uppoe that the monoponit can alway elect the producer in order to obtain the quantity x with the bet level of equipment within the interval [0,]. Thu, we denote by e% the threhold of equipment tarting from which the producer are elected by the monoponit: x e % = (3) J The rik aement on the market correpond to the knowledge of the relative poition of e% and e. A a reult, the level of rik depend on the level of quantity x demanded by the monoponit on the intermediary market. Let u denote by ˆx = J( e ), the quantity aked by the monoponit, uch that all the initially well-equipped producer are elected (that i e% = e ). Uing (3), we verify that e% e if and only if x xˆ. 3 Thi cae repreent the particular cae in which conumer treat the good a if it were perfectly afe. 4 Conumer purchae deciion i affected both by the degree of rik miperception and by the trut in food afety information (Lobb, Mazzocchi, Traill, 2007). Conumer rik miperception can be interpreted a a pychological trait of conumer. They may under- or overetimate the contamination rik according to everal determinant; namely perceived product conitency, interet in cooking, interet in the product, experience and confidence in purchae location (McCarthy and Henon, 2005), health lo, followed by pychological, financial, time and tate loe (Yeung and Yee, 2002). Moreover, advertiement and communication campaign potentially influence rik perception (Cota-Font and Moialo, 2007). 355

7 Therefore, if x xˆ (that i e% e ), no elected producer ha to modify hi equipment in order to upply the intermediary market. The tatitical ditribution of producer equipment on the upport [e,] % i then unchanged (with f(e) ). If x > xˆ (that i e% < e ), the producer which are initially located between e% and e have to modify their equipment in order to upply the intermediary market. A a reult of the equipment upgrading for producer uch that e% e e, the tatitical ditribution of the producer equipment on the upport [e,] % change and i given by: 0 if e % < e e f'(e) = e e % if e= e (4) if e < e Definition. A trategic choice of quantity x i denoted Equipment non-affecting (ENA) trategy if x i uch that no elected producer modifie hi equipment, that i x xˆ, or Equipment affecting (EA) trategy if x i uch that ome producer modify their equipment, that i x > xˆ. Let u denote by σ( x, e ) = σ( e) f ( e) de the contamination rik for a given level of food e % afety tandard e and for a quantity x demanded by the monoponit on the intermediary market. Uing (3) and (4), we then obtain : x 2 ( ) if x ˆx 2 J σ(x,e ) = σ(e)f(e)de= (5) e % x ( e )[ ( e )] if x > ˆx J 2 Uing (5), we verify that the rik i an increaing function of the upplied quantity. When the ENA trategy i implemented, the contamination rik σ (x,e ) doe not depend on the level of the food afety tandard e, a the monoponit only elect producer with a level of equipment higher than e. Converely, when the EA trategy i implemented, the great quantity demanded by the monoponit implie that alo initially not well-equipped producer are elected (that i producer with a level of equipment lower than the tandard e ). Thee producer have to upgrade their equipment level in order to comply with the food afety tandard e. A a reult, the contamination rik depend on the tandard e. In any cae, for a given level of e, the contamination rik σ (x,e ) i an increaing function of the quantity x demanded by the monoponit, a an increae of the quantity demanded on the intermediary market implicitly lead to an increae of the number of producer involved. The contamination rik affect the monoponit profit. Namely, it affect the reervation price and thu, the level of demand. Let u denote by ω the price paid by the monoponit on the intermediary market. The monoponit expected profit π (x,e, ω ), when the conumer rik miperception i, the demanded quantity i x, the intermediary price paid for that quantity i ω and the food afety tandard on the intermediary market i e, i thu given by : 356

8 , π (x,e ω) = [ α ( ) σ(x,e )l x ω]x (6) The quantity choice affect the monoponit expected profit by different way. On the one hand, the quantity directly affect the invere demand function. On the other hand, the quantity affect the contamination rik on the final market. A a reult, the quantity ha an indirect effect on the invere demand function (by affecting the reervation price), whoe magnitude depend both on the level of rik and on the conumer rik miperception. Monoponit optimal procurement trategy We aume that the monoponit ha complete negociation power toward uptream producer in the definition of the intermediary price ω. In other word, if the monoponit chooe to buy the quantity x on the intermediary market and ell it to the end market, then he optimally determine a level of the intermediary price ω (x), o a to involve the number of producer required to get and ell the quantity x. The monoponit elect the producer characterized by equipment between e% and. However, when the ENA trategy i choen, there i no producer which modifie hi equipment ( e% e ), thu producer can accept a null intermediary price in order to upply the intermediary market. If the EA trategy i choen, the producer which are initially located between e% and e have to invet in a higher equipment ( e% < e ). In particular, the producer located in e% i the lat (le equipped) producer which upgrade hi equipment by inveting e e%. Hence, he doe not participate in the market if the intermediary price i lower than e e%. Then, we have ω = e e% and the intermediary price i given by ω (x,e ) = e % e. Uing (3) we then obtain: 0 if x ˆx ω(x,e ) = x (7) ( e ) if x > ˆx J Let u underline that if an ENA trategy i implemented, then all the producer located within the interval [e,] agree to enter the intermediary market. Hence, the monoponit ha to elect only the highet equipment in order to get the quantity x. If an EA trategy i implemented, then the monoponit chooe an intermediary price ω (x,e ) uch that only the producer between e% and accept to join the intermediary market. Uing (5), (6) and (7), we then determine the optimal quantity choen by the monoponit a a function of the level of the tandard e. For every degree of conumer rik miperception, there exit two level, e and e, of the food afety tandard uch that the optimal quantity * x ( e ) monoponit, when the food afety norm i e, i given by: J[ e e ] if e * x (e ) = J [ e ] if e e e J Ψ ( e ) if e e etting : choen by the (8) 357

9 2 ( )l( e ) + 2( α + e ) Ψ (e ) = [ ] 4 ( )l( e ) + (J + ) The property Ψ (e ) = e i verified. 5 (9) Reult Uing (8), we can eaily determine the expreion of the other variable: the threhold equipment e % (e ), obtained by (3) the contamination rik σ ( e ), obtained by (5) the intermediary price ω ( e ), obtained by (7) the total uptream producer profit B( e,e, % ω ), given by 6 : 2 e (e e) % B( e,e, % ω ) = J{ [ ω ( e e )]de + ω( e )} = J [ ω( e % ) ] (0) e % 2 - and the conumer urplu S (e ), given by : 2 J [ 2 e ] if e e 2 2 J 2 S (e ) = ( e ) if e e e () 2 2 J 2 Ψ ( e ) if e e 2 Uing the expreion of the optimal quantity * x ( e ), given by (8), we then define the following three type of food afety regulation, which can be implemented by the public authority. Definition 2. A regulation whoe level of food afety tandard i given by e, i denoted weak if e e, moderate if e e e and trong if e > e. The expreion (8) and (9) characterize the monoponit optimal trategy, given the type of regulation choen by the public authority. Uing thi terminology, we provide in the next ection, an analyi of the effect of each type of regulation in term of both food afety and urplu of the different agent. 5 Thi property allow to verify that the optimal quantity choice of the monoponit i continuou in e. 6 By ubtituting (3) and (7) into (0), we eaily obtain the expreion of the total uptream producer profit B( e ) a a function of the food afety tandard. 358

10 Food afety regulation, monoponit electing trategy and the level of contamination rik Starting from the monoponit optimal quantity choice aociated with each type of food afety regulation and by comparing it to the quantity ˆx = J( e ), we obtain the following reult. Reult. If a weak regulation i implemented, then the monoponit chooe an ENA trategy. Neither the optimal quantity nor the contamination rik are affected by the food afety tandard. Weak regulation do not affect the uptream equipment level. Thu, a only the initially bet equipped producer are elected by the monoponit, then no equipment upgrading i required for producer to participate in the market. Furthermore, if no pecific production condition are required to acce the market (that i, if the food afety tandard i fixed at zero), then the exceeding upply reinforce the monoponit negociation power. Hence, the intermediary price equal zero (ee Figure below 7 ). Moreover, if thi type of regulation i implemented, an improvement of the food afety tandard doe not affect either the monoponit optimal quantity choice or the contamination rik, regardle of the degree of conumer rik miperception. From thi point of view, weak regulation reult in the ame effect which would arie from a paive attitude of the public authoritie toward food afety (that i, in the benchmark ituation e = 0). [inert Figure ] Reult 2. If a moderate regulation i implemented, then the monoponit chooe an ENA trategy. However, the contamination rik i lower than in the context of a weak regulation and decreaing in the food afety tandard. A the weak regulation, the moderate one do not affect the uptream equipment level. Indeed, the monoponit elect all the initially well-equipped producer and doe not pay them any remuneration. However, the level of food afety i improved with repect to the context of weak regulation. Moreover, an increae of the food afety tandard within the context of moderate regulation ( e e e ) affect the monoponit trategic behaviour, which in turn determine a food afety improvement. Indeed, if the food afety tandard i reinforced, the contamination rik decreae. Thi reult can be explained a follow. A the food afety tandard increae, the monoponit anticipate that by implementing an EA trategy he could have an action on the reervation price (through an action on the contamination rik), but he would have to pay a poitive remuneration to the uptream producer. Moreover, thi remuneration would increae in the level of the food afety tandard (ee Figure ). The monoponit thu prefer to improve demand by reducing the upplied quantity, rather than by implementing an EA trategy and paying the producer a poitive remuneration. Reult 3. If a trong regulation i implemented, then the monoponit chooe an EA trategy. The contamination rik i not necearily lower than in the context of weak regulation and i not necearily decreaing in the food afety tandard. 7 Figure -5 are created according to value of the parameter which are conitent with the baic model aumption; namely, they have been choen within conitent range of each variable, that i quantity, price and probability of crii ( J = 00, α = 200, l = 50 ). The following repreentative degree of miperception have been repreented : overetimation ( = ), perfect etimation ( = 0 ), and maximal underetimation ( =+ ). 359

11 If a trong regulation i implemented, the monoponit elect alo initially not wellequipped producer and pay them a poitive remuneration, in order to upport their equipment upgrading. A a reult, the trategic behaviour of the monoponit affect the contamination rik and thu the reervation price. We how that, if thi type of regulation i implemented, the food afety i not necearily improved with repect to the context of weak regulation. Figure 2-3 and 4 below illutrate the effect of the food afety regulation on the monoponit trategic choice of quantity, on the contamination rik and on the final price. [inert Figure 2-3-4] The monoponit reaction to a reinforcement of a trong regulation and the conequence on the contamination rik are affected by the degree of conumer rik miperception. Namely, the improvement of the food afety tandard implie a decreae of quantity when rik miperception i relatively high and an increae of quantity converely. Figure 3 how that in latter cae, the contamination rik i not necearily decreaing in the food afety tandard. In the context of trong regulation, the effect of a reinforcement of the food afety tandard on the optimal quantity depend on two key-factor. One the one hand, a the intermediary price i increaing in the food afety tandard (Figure ), then the monoponit ha an incentive to decreae the quantity if the food afety tandard become more demanding. On the other hand, a the reervation price increae in the tandard (through the reduction of the contamination rik), the monoponit ha an incentive to increae the quantity if the tandard increae. The degree of conumer rik miperception affect thi monoponit trade-off. Namely, the lower i the degree of miperception, the higher i the increae of reervation price which can be obtained through a reduction of the contamination rik. A a reult, when miperception i relatively low, the econd effect dominate the firt one. Thu, the monoponit may have a trategic behaviour, uch that he take advantage of a relatively low degree of conumer rik miperception (and of the related marginal effect on the reervation price) and increae the demanded quantity in repone to a food afety tandard improvement (ee Figure 2). Converely, a the degree of conumer rik miperception i relatively high, then the econd effect doe no longer dominate the firt one and quantity decreae in the food afety tandard, even if the action of the monoponit on the contamination rik may improve reervation price. Moreover, in the particular cae uch that conumer completely underetimate the rik ( =+ ) that i they treat the good a if it were perfectly afe then the econd effect completely diappear. That i, the monoponit ha no longer the poibility to improve demand by having an action on the contamination rik. Hence, the monopoonit quantity choice i only affected by the evolution of the intermediary price according to the level of the food afety tandard (ee Figure and 2). Then, the monoponit repone to a food afety improvement in term of quantity affect the level of contamination rik. The effect of a reinforcement of the food afety tandard on the contamination rik i thu trictly ariing from the monoponit quantity choice. Moreover, the contamination rik i a function of the food afety tandard. A a reult, the effect of the food afety tandard on the contamination rik depend on two keyfactor. One the one hand, the contamination rik increae in quantity, a an increae of the quantity demanded on the intermediary market implicitly lead to an increae of the number of producer involved. One the other hand, a an EA trategy i implemented, the contamination rik i a decreaing function of the food afety tandard. Thu, the contamination rik may increae in the food afety tandard, namely a far a the firt effect dominate the econd one. We verify that the firt effect i greater, the lower i the degree of miperception (ee Figure 3). Thu, food afety regulation may have a contradictory effect with repect to the objective of a food afety improvement; namely when the degree of rik miperception i relatively low. 360

12 In addition, Figure 4 how that for a given type of regulation and level of food afety tandard relatively low degree of miperception imply higher level of final price. However, when the degree of miperception i relatively low, a trong regulation doe not necearily imply a higher price, with repect to a weak regulation. Moreover, a trong regulation may determine a food afety improvement and at the ame time a lower final price (with repect to the weak regulation). If underetimation i maximal ( = + ), then the implementation of a food afety tandard implie a greater quantity retriction on the end market with repect to the abence of tandard (Figure 2). Moreover, a the quantity retriction increae in the food afety tandard, then the final price increae if the tandard become more demanding (Figure 2-4). A a reult, when conumer treat the good a if it were perfeclty afe, a food afety tandard improvement determine a decreae of conumer urplu 8 and an increae of final price. Food afety regulation, monoponit trategic behaviour and participation of uptream producer * Given the food afety tandard e, the monoponit optimally define the quantity x ( e ), which in turn determine de facto the number of uptream producer, which are excluded from the market. Let u thu denote by e % (e ) the threhold equipment tarting from which uptream producer are involved in the market (participating producer), when the level of miperception i and the food afety tandard i e. Reult 4. The number of producer elected by the monoponit i not affected by the food afety tandard if a weak regulation i implemented but decreae in the food afety tandard if a moderate regulation i implemented. Figure 5 below how the effect of the food afety regulation on the number of producer elected by the monoponit. A relatively great reinforcement of the food afety tandard (witching from weak to moderate regulation) implie a decreae of the number of uptream producer participating in the market, regardle of the degree of conumer rik miperception. [inert Figure 5] A witch from weak to moderate regulation, doe not affect the monoponit electing trategy: the monoponit continue to exert hi negociation power toward uptream producer and pay them a null remuneration, even if the food afety tandard increae. A the monoponit decreae quantity in order to improve demand (ee Reult 2), then the number of producer participating in the market decreae. Reult 5. If a trong regulation i implemented, then the number of uptream producer involved increae (decreae) in the food afety tandard when the degree of miperception i relatively low (high). If the Government i uppoed to minimize the threhold equipment, in order to minimize uptream producer excluion, then the analyi of the threhold equipment a a function of the food afety tandard point out an important policy implication, which i illutrated by the following reult. 8 Uing (8), (9) and (), we eaily verify that conumer urplu varie according to the quantity choen by the monoponit. 36

13 Reult 6. An excluion-minimizing Government chooe a weak regulation (or e = 0 ), when the degree of conumer rik miperception i relatively high and the tronget regulation ( e = ) when the degree of conumer rik miperception i relatively low. If the Government i uppoed to minimize the threhold equipment, in order to minimize uptream producer excluion, then he ha two oppoite trategie. He chooe either a null or a maximal tandard, according to the degree of conumer rik miperception. Namely, if miperception i ufficiently low, then paradoxically producer excluion i minimized by impoing the mot demanding tandard (Figure 5). Let u detail the link between conumer rik miperception and uptream producer excluion. The conumer rik miperception affect the monoponit trategic behaviour, which in turn affect the excluion of uptream producer. On the one hand, it i hown that for a given type of regulation and a given level of tandard relatively low degree of miperception favour the choice of a food afety tandard uch that producer excluion i relatively high (Figure 5). In fact, the excluion i decreaing in the degree of conumer rik miperception, for a given type of regulation and level of tandard. On the other hand, when the degree of miperception i relatively low, trong regulation do not necearily imply a higher excluion with repect to weak regulation. Indeed, we verify that for a relatively high level of tandard, within the context of trong regulation, the participation of uptream producer i higher than in the cae of weak regulation (Figure 5). Moreover, when the degree of miperception i relatively low, we how that two different level of food afety tandard may exit (in the context of trong regulation) uch that the ame contamination rik arie and the more demanding tandard correpond to a lower uptream producer excluion (Figure 3 and 5). That i, paradoxically, a lower uptream producer excluion may be achieved by chooing the more demanding tandard a a condition to acce the market. A a reult, the monoponit trategic behaviour, uch that the quantity increae in the tandard, may generate a poitive effect in term of uptream producer market acce. Moreover, we how that the uptream producer excluion may be minimized by chooing the mot demanding tandard, that i e =, which in turn determine the choice of an EA trategy by the monoponit. A a reult, relatively low degree of conumer miperception favour the participation of initially not well-equipped producer (a the monoponit ha interet in paying them a poitive remuneration in order to have an action on the reervation price). In addition, we how that, paradoxically, a trong regulation may determine a food afety improvement and at the ame time a decreae of producer excluion (with repect to the abence of regulation). Final remark In thi paper, we have provided a normative analyi of the effect of food afety regulation within food chain, when the anitary rik reult from the uptream production condition. Our formal analyi ha allowed to illutrate the complex trategic interaction among food chain participant (uptream producer, downtream proceing or retailing firm, final conumer). We have hown why the effectivene of food afety regulation, in term of contamination rik reduction, reult from a good anticipation of firm trategic behaviour. A downtream firm may adopt different procurement and commercialization trategie (coniting of uptream producer election and remuneration, choice of quantity and final price), according to the level of the food afety tandard fixed by the public 362

14 authority. Thee choice affect not only the level of contamination rik, but alo the allocation of value among upply chain participant. The firm reaction to the level of food afety tandard i alo affected by market repone to the firm effort aimed at improving food afety; namely by the conumer rik miperception. Hence, with repect to uptream producer participation in the market, downtream firm react poitively to highly demanding food afety tandard, when the degree of conumer rik miperception i relatively low. Moreover, we have hown the economic condition uch that a food afety improvement i conitent with the economic interet of the other upply chain participant (uptream producer and conumer). Furthermore, our paper provide an original contribution in the ene that it explicitly take into account the heterogeneity of uptream producer capacitie to comply with the food afety tandard. If a food afety improvement i intended to be achieved, thi heterogeneity may reult in two poible cenario. The firt one conit of trongly electing uptream producer, without encouraging an improvement of production condition. The econd one conit of driving an improvement of initial production condition. The firt cenario which reult in a great uptream producer excluion from the market i no longer encouraged by the public authority when ocial reaon or agriculture multifunctionality iue are put forward. Neverthele, the econd cenario may be highly cotly and require overly high public funding. However, we have hown how a highly demanding regulatory tandard may allow to partially tranfer thee cot to firm. The electing trategy which we have examined (correponding to the ENA trategy) i frequently oberved within vertical relationhip in food chain. Thi trategy allow the downtream firm to acce to the afet quantity procurement. When it i poible (from a technical, legal and economic point of view), the ame quantity may be obtained by implementing a private food afety tandard, more demanding than the legilation (indeed a development of private food afety tandard from proceing and retailing firm ha been oberved). Taking into account thi type of trategy in our model, would allow to analyze the complementarity and ubtitutability of thee two type of trategie and provide a further element to the analyi of firm trategic behaviour. Moreover, public authoritie often implement other type of regulatory tool, which conit of making firm liable for food afety damage, by impoing them penaltie if a anitary crii occur. The main idea behind thi kind of regulation conit of making firm liable and thu encouraging them to exert precautionary effort aimed at minimizing the rik of contamination damage. Thi i the reaon why a large wathe of the literature aim at comparing thi ex-pot regulation to the ex-ante regulation, which we have examined in thi paper by conidering that a minimum level of equipement i required for uptream producer to acce the market 9. Reference Antle, J.M. (999). Benefit and Cot of food afety regulation. Food Policy, 24: Arvanitoyanni, I.S., Krytalli, A. (2005). Conumer belief, attitude and intention toward genitically modified food, baed on the perceived afety v. benefit perpective. International Journal of Food Science and Technology, 40: Bazoche, P., Giraud-Héraud, E., Soler, L-G. (2005). Premium Private Label, Supply Contract, Market Segmentation, and Spot Price. Journal of Agricultural & Food Indutrial Organization, 3(), Article 7, 9 Several contribution analyze the ubtitutabiliy and complementarity of thee two regulatory tool a mean of controlling externality-creating activitie (ee for example, Shavell, 984, Koltad et al., 990, Schmitz, 2000, Inne, 2004). Neverthele, except for a few contribution (ee for example, Hiriart, Martimort and Pouyet, 2004, Boyer and Porrini, 2004), the market dimenion and the role of vertical relationhip are often neglected. 363

15 Berger, M.C., Blomquit, G.C., Kenkel, D., Tolley, G.S. (987). Valuing change in health rik: a comparion of alternative meaure. Southern Economic Journal, 53: Boyer, M., Porrini, D. (2004). Modelling the choice between regulation and liability in term of ocial welfare. Canadian Journal of Economic, 37(3): Buzby, J.C., Ready, R.C., Skee, J.R. (995). Contingent valuation in food policy analyi: a cae tudy of a peticide-reide rik reduction. Journal of Agricultural and Applied Economic, 27: Cawell, J.A., Kleinchmit, J.K. (997). Uing Benefit-Cot Criteria for Settling Federalim Dipute: An Application to Food Safety Regulation. American Journal of Agricultural Economic, 79: Cota-Font, J., Moialo, E. (2007). Are perception of rik and benefit of genitically modified food (in)dependent? Food Quality and Preference, 8: Cropper, M.L., Freeman, A.M. (99). Environmental health effect. In: Braden, J.B., Koltad, C.D. (Ed.), Meauring the Demand for Environmental Quality. North- Holland, Amterdam. Fox, J.A., Shogren, J.F., Haye, D.J., Kleibentein, J.B. (995). Experimental auction to meaure willingne to pay for food afety. In: Cawell, J.A. (Ed.), Valuing Food Safety and Nutrition. Wetview Pre, Boulder, CO. Fulponi, L. (2006). Private voluntary tandard in the food ytem: The perpective of major food retailer in OECD countrie. Food Policy, 3: -3 Giraud-Héraud, E., Hammoudi, A., Soler, L-G. (2006). Food afety, liability, and collective norm. Cahier de l Ecole Polytechnique, Harrington, W., Portney, P.R. (987). Valuing the Benefit of Health and Safety Regulation. Journal of Urban Economic, 22(): 0-2. Havinga, T. (2006). Private Regulation of Food Safety by Supermarket. Law and Policy, 28(4): Henon, S., Cawell, J. (999). Food afety regulation: an overview of contemporary iue. Food Policy, 24: Henon, S., Heaman, M. (998). Food afety regulation and the firm: undertanding the compliance proce. Food Policy, 23(): Hiriart, Y., Martimort, D., Pouyet, J. (2004). On the optimal ue of ex-ante regulation and ex-pot liability. Economic Letter, 84: Hirchauer, N. (2004). A model-baed approach to moral hazard in food chain. Agrarwirtchaft, 53: Inne, R. (2004). Enforcement cot, optimal anction and the choice between ex-pot liability and ex-ante regulation. International Review of Law and Economic, 24: Koltad, C.D., Ulen, T.S., Johnon, G.V. (990). Ex-pot liability for Harm v.ex-ante Safety Regulation: Subtitute or Complement? The American Economic Review, 80(4): Loader, R., Hobb, J.E. (999). Strategic repone to food afety legilation. Food Policy, 24: Lobb, A.E., Mazzocchi, M., Traill, W.B. (2007). Modelling rik perception and trut in food afety information within the theory of planned behaviour. Food Quality and Preference, 8: McCarthy, M., Henon, S. (2005). Perceived Rik and rik reduction trategie in the choice of beef by Irih conumer. Food Quality and Preference, 6: Mead, P.S., Slutker, L., Dietz, V., McCaig, L.F., Breee, J.S., Shapiro, C., Griffin, P.M., Tauxe, R.V. (999). Food-related illne and death in the United State. Emerging Infectiou Dieae, 5(5): Polinky, A.M., Rogeron, W.P. (983). Product Liability, Conumer Miperception and Market Power. The Bell Journal of Economic, 4(2):

16 Roe, B., Teil, M.F., Levy, A.S., Boyle, K., Meonnier, M.L., Rigg, T.L., Herrmann, M.J., Newman, F.M. (2000). Conumer aement of the food afety problem for meal prepared at home and reaction to food afety labeling. Journal of Food Product Marketing, 6(4): Roati, S., Saba, A. (2004). The perception of rik aociated with food-related hazard and the perceived reliability of ource of information. International Jounal of Food Science and Technology, 39: Schmitz, P.W. (2000). On the joint ue of liability and afety regulation. International Review of Law and Economic, 20: Shavell, S. (984). A Model on the Optimal Ue of Liability and Safety Regulation. The Rand Journal of Economic, 5(2): Shavell, S. (2007). Do exceive legal tandard dicourage deiderable activity? Economic Letter. In pre. Starbird, S.A., Amanor-Boadu, V. (2007). Contract electivity, Food Safety and Traceability. Journal of Agricultural & Food Indutrial Organization, 5(), Article 2, Unnevehr, L.J., Jenen, H.H. (999). The economic implication of uing HACCP a a food afety regulatory tandard. Food Policy, 24: Vicui, W.K. (2006). Regulation of Health, Safety and Environmental Rik. Dicuion Paper No.544, Harvard Law School. Cambridge, MA Vicui, W.K., Harrington, J.E., Vernon, J.M. (2005). Economic of Regulation and Antitrut, Fourth Edition. MIT Pre, Cambridge. Yeung, R.M.V., Yee, W.M.S. (2002). Multi-dimenional analyi of conumer-perceived rik in chicken meat. Nutrition and Food Science, 32(6): Figure Figure - Effect of the food afety tandard on the intermediary price ω (e ) α ω () = 2( J + ) =+ = 0 = 0 e e 365

17 Figure 2 - Effect of the food afety tandard on the monoponit quantity choice * x (e ) J =+ = 0 Jα x( ) = 2( J + ) = 0 e e e Figure 3 - Effect of the food afety tandard on the contamination rik σ (e ) 2 =+ = 0 = σ () = 0 0 e e e* e 366

18 Figure 4 - Effect of the food afety tandard on the final price p (e ) α = = 0 =+ α (2+ J) p( ) = 2( J + ) e e e Figure 5 - Effect of the food afety tandard on the uptream producer excluion % e (e ) = = 0 =+ α e() % = 2( J + ) 0 e e e 367

19 Contact information Critina Grazia Dipartimento di Economia e Ingegneria Agrarie Alma Mater Studiorum Univerità di Bologna v.le Fanin, Bologna Phone: Fax: c.grazia@unibo.it 368