Country of Origin Labeling with Horizontal Differentiation and Cost Variability
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This paper studies whether a seller achieves higher profits by providing consumers with information that allows them to distinguish between products from different countries, and how mandatory provision of such information impacts welfare. We analyze a model of multi-product monopoly with horizontal differentiation and random country-specific input costs. We find that if the variability in the input costs is sufficiently high and the share of consumers with high valuations is in some intermediate range, the seller prefers to withhold information about product origin. Mandatory labeling of products with their country of origin may reduce or increase welfare depending on the share of consumers with high valuations. We also discuss extensions of the basic model that allow for continuous distributions of valuations and input costs, and consumer learning.