What Happens When Food Marketers Require Restrictive Farming Practices?

23 Pages Posted: 15 Apr 2020

See all articles by Marten Graubner

Marten Graubner

University of California

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics

Daniel A. Sumner

University of California, Davis - Department of Agricultural and Resource Economics

Date Written: July 2015

Abstract

The dimensions that define a food product have expanded rapidly to include characteristics of the production process, marketing arrangements, and implications that production and consumption of the product have for the environment. Some market intermediaries have responded by requiring that their suppliers abide by restrictive production practices. We examine the economic effects of such restrictions and apply this analysis to limitations on the use of antibiotics in U.S. pork production. Results from conceptual and simulation analyses show that, in the absence of demand growth, less pork is sold due to higher costs in the restricted segment, and both pork consumers (on average) and producers are harmed. Demand growth of between 6–11% from adding new consumers who will consume the restricted (antibiotic‐free) product but not the conventional product is needed to return consumer surplus to the level in the base case, and between 2–4% demand growth was required to return producer surplus to base. When restricted and conventional products are modeled using a vertical differentiation framework, results depend importantly on the ease with which consumers can switch to a seller who offers their desired product type. Significant distributional impacts among consumers are present when switching costs are prohibitive.

Keywords: Hog production, antibiotics, food quality, animal welfare, corporate responsibility

Suggested Citation

Graubner, Marten and Sexton, Richard J. and Sumner, Daniel A., What Happens When Food Marketers Require Restrictive Farming Practices? (July 2015). American Journal of Agricultural Economics, Vol. 97, Issue 4, pp. 1021-1043, 2015, Available at SSRN: https://ssrn.com/abstract=3574925 or http://dx.doi.org/10.1093/ajae/aav021

Marten Graubner (Contact Author)

University of California

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
327 Voorhies
Davis, CA 95616
United States
530-752-2219 (Phone)

Daniel A. Sumner

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-5002 (Phone)
530-752-5614 (Fax)

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