We have all seen the stickers on our food that tells us where that particular piece of food was grown. This is called country of origin labeling, or COOL, and has a goal of helping consumers make informed choices when buying their food. Mandatory labeling for beef, lamb, pork, fish, perishable agricultural commodities, and peanuts was part of the 2002 Farm Bill, but was not implemented until the Spring of 2009. In the article Consumer Perceptions and the Effects of Country of Origin Labeling on Purchasing Decisions and Welfare, published in the January 2012 issue of Food Policy, Lana Awada and Amalia Yiannaka develop a general framework to examine market and welfare effects of COOL implementation.
Awada and Yiannaka look at a variety of cases including going from a no COOL to a voluntary COOL regime and a voluntary to a mandatory COOL regime. The study looks at both of these scenarios within vertical and horizontal product differentiation. Vertical product differentiation is when COOL is indicative of the products quality and horizontal product differentiation is when COOL is not indicative of a products quality, but gives information that allows consumers to express support for a particular country's economy. The study showed that both market and welfare effects of COOL were the same regardless of vertical or horizontal product differentiation.
While vertical or horizontal product differentiation didn't matter, the same could not be said moving to a mandatory COOL system from a no COOL or from a voluntary COOL system. The authors found the market effect of a mandatory system depended on relative prices of products and the strength of the general consumers' preference to labeled products. They found the higher the price of the labeled item and the lower the preference for the item, will cause the labeled product to have a smaller market share. Awada and Yiannaka also found that when moving from a no COOL to a mandatory COOL regime, there are welfare losses and gains. Consumers with strong preferences for COOL saw welfare gains due to new information, while those with little to no preference saw welfare losses due to increased prices and lack of an unlabeled product. However, when moving from voluntary to mandatory COOL there were undisputed welfare losses as those with a strong preference for COOL saw no welfare change and those with little to no preferences saw higher prices and the disappearance of the unlabeled product. The size of these welfare losses and gains ultimately depends on how much consumers value COOL products.