Grading, Minimum Quality Standards, and the Labelingof Genetically Modified Products

In this paper we relate the economics of labeling genetically modified (GM) products to thetheory of grading and minimum quality standards. The model represents three stages in thesupply chain (farm production, marketing handlers, and final users) and allows explicitly for theaccidental co-mingling of non-GM products at the marketing stage. Regulation takes the form ofa threshold level of purity for non-GM products. The paper also presents a novel demandspecification for differentiated GM and non-GM products that is particularly useful in ourstochastic framework. First, we find that if the threshold purity level for non-GM products is toostrict, this necessarily leads to the disappearance of non-GM product from the market. Second, weshow that some quality standard is in the interest of farmers as well. Indeed, we show that thestandard that is optimal from the perspective of producers is actually stricter than what is optimalfor consumers and for societal welfare. We conclude with comparative statics effects thatillustrate the impact of the model’s parameters on market equilibrium and on the welfaremaximizingregulatory standard.[...]