In analyzing the market and welfare effects of MCOOL for specialty crops, a distinct feature of this study is that it explicitly accounts for differences in consumer preferences for domestic and imported products, differences in agricultural producer efficiency, and retailer market power when buying and selling these products.
Section 2 provides some background information on the MCOOL regulation for specialty crops.
In particular, grocery stores with an annual invoice value of less than $230,000 for fruits and vegetables, as well as food service establishments (such as restaurants, food stands, and delicatessens and salad bars within retail stores), are excluded from MCOOL requirements.
In analyzing the market and welfare effects of MCOOL, our study focuses on covered agricultural commodities (ACs) affected by MCOOL (i.e., products that were not labeled prior to the introduction of MCOOL and are sold through retail establishments that buy fruits and vegetables for at least $230,000 per year).
Our analysis focuses on the decisions and welfare of consumers, producers, and retailers of products affected by MCOOL. Retailers face a demand for AC from consumers that is satisfied with domestic and imported AC.
It is important to point out that the ramifications from the introduction of MCOOL cannot be fully analyzed with the conventional supply-and-demand model for two separate markets (those for domestic and imported products), since in the pre-MCOOL situation there is only one demand for the unlabeled product, while in the post-MCOOL scenario there are two demand schedules, one for the imported and one for the domestic product.
In the remainder of this section, the behavior of heterogeneous consumers, heterogeneous producers, and retailers with potential market power when buying and/or selling the AC are analyzed first, followed by the derivation of the market equilibria before and after the introduction of MCOOL. The market and welfare effects of MCOOL are obtained, then, through a comparison of these pre- and post-MCOOL equilibria.
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. Based on the optimality condition in Equation 12, the equilibrium quantity of non-labeled product is
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.sub.US] > [p.sub.M].