Organic Label, Bargaining Power, and Profit-sharing in the French Fluid Milk Market

Summary

The paper determines how the value-added created by an organic label is shared in a vertical chain among manufacturers and retailers. Using purchase data on the French fluid milk sector, we develop a structural econometric model of demand and supply that takes into account the bargaining power between manufacturers and retailers. Our results suggest that the organic label segment is more profitable, as it permits the existence of higher margins. Moreover, an organic label allows manufacturers to achieve more bargaining power relative to retailers, and hence to obtain a higher share of total margins. The econometric model is then used to assess the impact of an environmental policy in favor of the organic segment based on a mechanism of price support. Our results suggest that while a subsidy policy towards organic products benefits both manufacturers and retailers, a tax policy toward conventional products benefits manufacturers of national brands at the expense of retailers and manufacturers that provide the private labels. The benefits of such policies on the environment is relatively small. All such policies tend to increase the impact on global warming and land use, but reduce the impact on eutrophication, acidification, and energy use.