Prior to the MCOOL introduction, domestic and imported ACs are marketed together as a non-labeled good.
Figure 3 depicts the market equilibrium before the introduction of MCOOL.
As mentioned previously, under MCOOL retailers are required to inform consumers about the origin of the AC, allowing them to distinguish between domestic and imported ACs.
Under MCOOL consumers have the choice between the labeled domestic AC, the labeled imported AC, the substitute product, and not consuming any of these products.
To capture the empirically relevant case in which these products coexist in the market under MCOOL, we focus our analysis on the case where [p.
and the inverse demands for the two products under MCOOL are
As mentioned previously, in the presence of MCOOL, producers need to maintain a record-keeping system to provide credible information to retailers about the origin of the AC.
Under MCOOL, retailers face increased costs of segregation and labeling of the AC, denoted by K.
Note that since imported food items needed some form of origin information when entering the country, even before MCOOL, importers will not incur additional labeling costs as a result of the MCOOL regulation.
Figure 5 depicts the market equilibrium under MCOOL when both products coexist in the market.
The change in consumer welfare after MCOOL introduction is the outcome of two opposite effects: a utility effect and a price effect.
The utility effect consists of a reduction in the willingness to pay (WTP) for the inferior imported product and an increase in the WTP for the superior domestic product (relative to the WTP for the non-labeled product) after the introduction of MCOOL (i.