Are Minimum Quality Standards Acting as Nontariff Trade Barriers?

International Relations/Trade,

Effects of Market Power on the Size and Distribution of Subsidy Benefits: The Case of Ethanol Promotion

The subject of market power is discussed frequently in debates about subsidies for ethanol production, and structural conditions in the industry create a prima-facie case for concerns about market power. This paper develops a prototype model for determining the production and price impacts and distribution of benefits from the U.S. ethanol subsidy when upstream sellers in the seed sector and downstream buyers in the processing sector may exercise market power. The impact of the subsidy is analyzed within a simulation framework for alternative levels of market power. Results demonstrate that the impacts on prices and output are limited for modest departures from competition. Distributional impacts are much greater. Seed producers and corn processors with market power are able to capture relatively large shares of the benefits from the subsidy. A perhaps surprising result is that upstream oligopoly power exercised by seed producers is prospectively as important in influencing the positive and distributional impacts of the subsidy as the much more frequently discussed and debated prospect that downstream corn processors may exercise buyer power.Resource /Energy Economics and Policy,

The Implications of Marketing-Order Quality Regulations in a Free-Trade Environment

Among other functions, federal marketing orders allow producers to impose quality regulations and inspections, and, under the section 8e provision, require imports to be subject to the same quality standards and regulations as the domestic industry. As efforts to liberalize trade continue apace, the degree to which a minimum quality standard (MQS) can be used in conjunction with section 8e as a nontariff trade barrier becomes a subject of increasing importance. The high incidence of utilization of the section 8e provision, coupled with a relatively high degree of variability of standards over time, serves to motivate this research on how MQS imposed through marketing orders can affect producer profits, consumer welfare and influence trade patterns. Our model investigates specifically the impacts of a MQS imposed by a domestic agricultural industry under the auspices of a marketing order in both a closed- and open-economy setting under both perfect and imperfect competition. The model allows domestic producers to act collectively, as permitted under marketing-order provisions, and to choose whether or not to impose a MQS based upon whether the industry profit under the MQS exceeds the profit under no regulation. We show that when the product is sold competitively, any market condition that causes the domestic industry to impose an MQS insures that all consumers of the product are harmed by the MQS and total welfare declines. An open-economy setting expands the range of model parameterizations when a domestic industry will implement an MQS because it can often direct the costs imposed by the MQS primarily to importers, while capturing the majority of the benefits, a type of raising rivals cost phenomenon. However, in duopoly competition between a domestic industry and an exporter, we show that a MQS can eliminate the incentives of the duopolists to under provide quality enhancement, potentially leading to situations where MQS can be socially beneficial

A Flexible Oligopoly-Oligopsony Model for Classroom Simulations and Policy Analyses

We present a flexible model of a vertical market where firms with possible oligopsony power procure a key input, combine it with other inputs purchased competitively, and sell a final product to consumers in a market that may have oligopoly power. The model is capable of depicting all forms of market power ranging from perfect competition to pure monopoly/monopsony. A linear version of the model depicts market equilibrium in terms of only five parameters. The model is useful in teaching undergraduate students about the impacts of market power in classes such as microeconomics, industrial organization, and regulation. An accompanying Excel spreadsheet enables instructors to conduct in-class illustrations and students to utilize the model to perform various problem solving and policy analyses.

Impacts of Minimum Quality Standards Imposed Through Marketing Orders or Related Producer Organizations

We analyze the impacts of minimum quality standards (MQS) imposed by producers acting collectively through a producer organization, such as a marketing order. MQS imposed in a competitive market can never enhance social welfare because in general an MQS creates two deadweight losses--one due to inefficient enhancement of product quality and a second due to wastage of the low-quality product. Any MQS that a competitive industry implements based upon a profit criterion causes all consumers in the market to be harmed. However, an MQS may be preferred relative to supply control as a second-best instrument for transferring income to producers. Copyright 2009, Oxford University Press.