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21.09.2015
The restriction on the efficiency term is imposed because this is a multiplicative term, which is forced to be between 0 (perfect inefficiency) and 1 (perfect efficiency).
1 Introduction Participation Update Chapter 12: The Strategy of International Business Chapter 13: The Organization of International Business Globalization Debate! 2 Shekinah Adebanjo (Essex, England) Kamel Ait El Hadj (Paris, France) Jaime Fernandez-Cuervo (Madrid, Spain) Dennis Ly (Malm o, Sweden) Charlene Selle (Hamburg, Germany) Shublove Gupta (New Delhi, India) Enrique Parra Arce (Madrid, Spain) Alejandro Chinchilla Vargas (San Jose, Costa Rica) Rahil Pujara (Rajkot, India) Daniel Brizan (Port of Spain, Trinidad) Erika S a nchez (Bogot a, Colombia) Yu Su (Susanna) Qian (Melbourne, Australia) Mayank Mittal (Mumbai, India) Sherif Shabana (Cairo, Egypt) Anna Serwy Constantino (Orlando, USA) Henrique Menezes Aguiar (Sao Paulo, Brazil) Geraldo Carvalho (Sao Paulo, Brazil) Thais Gruenwald Gaspar (Sao Paulo, Brazil) Rohit Navale (Pune, India) Sebastian Eldrup-Jorgensen (Copenhagen, Denmark) What do you have in common? 8 Value Creation Value Creation Activities – allow a company to achieve superior efficiency, excellent quality, innovation, and customer responsiveness. 11 Michael Porter states that there are two basic strategies for creating value and attaining a competitive advantage in an industry: – Low-Cost Strategy vs.
13 The Firm as a Value Chain Any firm is composed of a series of distinct value creating activities – Primary activities Research & development Production Marketing & Sales – Activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. 27 International Strategy International Strategy – transfer the skills and products derived from distinctive competencies to foreign markets, while undertaking some limited local customization.
Vertical integration will make sense if there are strategic similarities between vertically related activities, if there are tax or regulatory issues that make contractual transactions difficult or expensive, or if joint ownership will allow for specific investments in capabilities and assets that may not happen in an independent set up. If the quantity required from a supplier is quite minimal (less than minimum efficient scale), if a product is a widely available commodity, if core competencies between firms are radically different, vertical integration probably doesn’t make sense.
Horizontal integration refers to the acquisition of an operation at the same level of the value chain (in the graphic above, a firm who owns one assembly plant buying another assembly plant).
There could potentially be anti-trust and legal issues, if a firm’s market share becomes too large. Tree maps are a way to visualize data that has a hierarchical structure, using rectangles where the size of the surface represents the importance of the respective data element. This is a very effective strategy framework which is unfortunately not very frequently used in the real world.
This concept comes from a book by the same name, “The Flow”, by Mihaly Csikszentmihalyi, from 1990.
The Value Net or Coopetition framework is an alternative to Porter’s Five Forces framework. The Innovation Ambition Matrix is a variant of another 2×2 growth framework, comparing the axes of where to compete (existing vs. I’m having fun with finding more icons reflecting the Core Values of various firms or organizations. This framework is based on an article from the Harvard Business Review, December 2011 (link) titles “The Power of Collective Ambition,” by Douglas Ready and Emily Truelove. Here is a somewhat complicated but very comprehensive model to assess the sales function of a company or business unit.
Clayton Christensen’s book “The Innovator’s Dilemma (Harper, 2000) is certainly one of the most important business and strategy books from the last two decades. I’m staying with the theme of Organizational Design of my last few posts related to strategy frameworks. This blog post relates to a number of other recent posts on organizational design frameworks (e.g. We recently worked on a proposal for an organizational design project, and I came across a number of interesting frameworks related to organizational design. On a recent transatlantic flight on BA, I watched two episodes of Community, a new TV show that I was frankly not familiar with (OK, so I haven’t been part of the show’s hip and enthusiastic online community, the enviable demographic that advertisers crave – at least not yet).
Many projects include the use of scenarios, and it’s often quite difficult to depict them graphically. A Pareto Chart is a graph with both bars and a line, where the individual values of a data series are presented in vertical bars (generally in descending order), and the cumulative values are presented as an increasing, concave line.
The “Measure – Analyze – Improve – Control” framework, sometimes also referred to as the 4Q (for 4 quadrants) methodology, is based on a classic six sigma methodology of problem solving. These diagrams are named after Kaoru Ishikawa, a Japanese professor and influential quality management expert. Hopefully, when you approach a strategic challenge, you’ll start this problem solving exercise by developing an issue tree, defining the various options, identifying the analyses necessary to support potential solutions, and then come up with a story line that reflects your issue tree and your findings.
There are numerous ways to structure and describe the phases an organization will go through in the course of a change management process or transformation program.
We used a time line chart again in a recent steering committee document for one of our a-connect projects. This list of questions is based on a book by Robert Simons, a Harvard professor (“Seven Strategy Questions” (Harvard Business Press, 2010). This is a framework that one of our professionals used on a recent large scale transformation project with a fairly large team. Philippe Haspeslagh and David Jemison (90) developed concept to define which approach would be most appropriate when integrating various parts of an organization after an acquisition.
One of our current efforts at a-connect is to improve our knowledge management capabilities and processes.
This is not a revolutionary new framework from a strategy guru, it’s just a visually compelling chart that I recently saw in a presentation. I have talked about other marketing frameworks, such as the 4 Ps (product, price, place and promotion) or the AIDA framework (attention, interest, desire, action). Many thanks for your great service - the train and airplane seats were great and I really appreciate you help with travel planning. Dali is located at a low-latitude mountain plateau which makes the climate in Dali with short, mild, dry winters, and warm, rainy summer.
Close to the Tropic of Cancer, there is no huge difference between four seasons in Dali with average temperature between 12°C to 19 °C.
Our tour guide, Mike, made sure that we got all the meals we were promised on our itinerary and being vegetarian was not a problem as he ensured we were all well catered for. Our travel agent, Ms Sophia, was great, and she handled at my quries promptly and effectively. We were very well treated by Beijing Holiday and highly recommend them to anyone planning a holiday in China - it's very affordable, safe, convenient and overall, amazing. CORE CONCEPTS ¦Horizontal scope is the range of product and service segments that a firm serves within its focal market. HORIZONTAL MERGER AND ACQUISITION STRATEGIES ? Merger ? Is the combining of two or more firms into a single corporate entity that often takes on a new name. STRATEGIC OJECTIVES FOR HORIZONTAL MERGERS AND ACQUISITIONS ? Creating a more cost-efficient operation out of the combined companies. WHY MERGERS AND ACQUISITIONS SOMETIMES FAIL TO PRODUCE ANTICIPATED RESULTS ? Strategic Issues: ? Cost savings may prove smaller than expected. VERTICAL INTEGRATION STRATEGIES ? Vertically Integrated Firm ? Is one that participates in multiple segments or stages of an industry’s overall value chain.
TYPES OF VERTICAL INTEGRATION STRATEGIES ? Full Integration ? A firm participates in all stages of the vertical activity chain. INTEGRATING BACKWARD TO ACHIEVE GREATER COMPETITIVENESS ? Integrating Backwards By: ? Achieving same scale economies as outside suppliers— low-cost based competitive advantage.
INTEGRATING FORWARD TO ENHANCE COMPETITIVENESS ? Reasons for Integrating Forward: ? To lower overall costs by increasing channel activity efficiencies relative to competitors. DISADVANTAGES OF A VERTICAL INTEGRATION STRATEGY ? Increased business risk due to large capital investment. OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS ? Outsourcing ? Involves farming out value chain activities to outside vendors.
THE BIG RISKS OF OUTSOURCING VALUE CHAIN ACTIVITIES ? Hollowing out resources and capabilities that the firm needs to be a master of its own destiny. CORE CONCEPTS ¦A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective. REASONS FOR ENTERING INTO STRATEGIC ALLIANCES ? When seeking global market leadership: ? Enter into critical country markets quickly. THE DRAWBACKS OF STRATEGIC ALLIANCES AND PARTNERSHIPS ? Culture clash and integration problems due to different management styles and business practices. CHAPTER 6 STRENGTHENING A COMPANY’S COMPETITIVE POSITION Strategic Moves, Timing, and Scope of Operations. SUPPLEMENTING THE CHOSEN COMPETITIVE STRATEGY: OTHER IMPORTANT STRATEGIC CHOICES Chapter 6 MGT 4380. 6-1 Beyond Competitive Strategy Other Important Strategy Choices Prof R K Verma SBS,Sharda University.
When a Low-Cost Provider Strategy Works Best Price competition among rival sellers is vigorous. Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing 9 Chapter Prepared by C. His interest is mainly focused on the analysis of food consumption and demand from a quantitative, applied micro-econometric perspective on households and consumers. Equation (2) is estimated via Maximum Likelihood using Stata, obtaining both parameters and the efficiency term using stochastic frontier estimation. Although difficult to believe from a statistical standpoint, this can be explained by the quality of the data. The wide variety of products that can be found in most markets originate from a combination of vertical and horizontal differentiation. Differentiation – Low Cost - value is created for the customer by offering low priced products. Configure internal operations, such as manufacturing, marketing, logistics, IT, and HR to support your position. The graphic above shows a manufacturing example, with five simple steps (from raw materials, to component manufacturing, to assembly, to distribution, to the end user).
Vertical integration also can have the significant drawback that it may put a firm in competition with another company it needs to cooperate with.
They provide two-dimensional colored matrices, with the objective to better present tabular data so that the audience can instantly see the big picture and spot outliers and groups very easily. He is a Hungarian psychology professor with a famously unpronounceable name, who emigrated to the US at the age of 22 and taught at the University of Chicago, Lake Forest College and Claremont Graduate College. One of our consultants recently used this term in the context of a process improvement project, and I can’t believe I hadn’t heard about it before! They quickly help to visualize the key performance drivers, and the linkages between them, on one chart.
Every strategy consultant, and probably every internal project manager, has at some point in their life been through an exercise to define the vision, mission and core values of their company or division. It profiles, among others, the Four Season’s Hotel chain, who survived the latest recession remarkably well. If there is one chart and concept that summarizes his theory on disruptive innovation, it’s the chart on the evolution of the disk drive industry.
It’s a good diagnostic tool to engage a client in a discussion around how ready the broader organization (or a specific team) is for a significant change initiative.


Below is the first of those frameworks; I will follow-up with other examples in coming blog posts. Witness HBR’s recent “How to Design a Winning Business Model” (one article in an entire edition dedicated to business models) or “Why Companies Should Have Open Business Models” by MIT Sloan Management Review.
Here is a good way to summarize at a high level four different scenarios, based on two key uncertainties.
Some firms refer to the fourth quadrant as “Sustain,” but Control is used most often in six sigma literature.
They were first started to be used in the 1940s, and are considered to be one of the seven important tools in quality management. There are a number of traditional criteria that drive the integration approach: size of the respective businesses, style of the acquirer, overlap in terms of products and customers, etc. In the 1970s he proposed a model of growth phases for start-ups, based on the recognition that many entrepreneurial companies go through predictable cycles of growth spurts and crises. This one applies to classifying the employees of a group or department into four buckets, based on low or high performance as well as low or high potential. The framework below from PA Consulting highlights some of the key elements: In each dimension, the capabilities will vary along a spectrum, from very basic tasks to quite sophisticated skills.
It breaks down the market growth of a given industry into a variety of factors, some being growth drivers, some being constraints.
It is a framework used in the early phases of strategy development to describe the landscape and environment, in which a firm operates.
Below is an overview strategic marketing framework that includes both of those: It’s a fairly self explanatory summary, certainly not rocket science. Winter from November to March with less rainfallwhile summer from may to October with more rainfall. 6-2 Choosing Strategy Actions that Complement a Firm’s Competitive Approach Decisions regarding the firm’s operating scope and how to. The sample of producers and wines from medium enterprises is relatively under-represented in the present data, which implies that our figures apply to a very homogeneous sample of products.
Furthermore, the decision to supply products in different segments of the market can be both a response to an existing demand and a supply situation.
If a firm is currently active in the assembly segment of the value chain, vertical integration could either go backward (or upstream) buying a component manufacturer. If you need various distributors for your product, and you then buy one of those distributors, the others will start to look at you as a competitor! Most people are familiar with the Balanced Scorecard concept originally introduced by Kaplan and Norton. Often one of the goals of an organizational design project is to “simplify” structures and process so that people can do their jobs more effectively. Mildly reminds you of the BCG matrix with the stars, the dogs, the cows and the question marks, doesn’t it? It’s particularly useful for situations where firms consider entering a new geography, e.g.
The main areas of interest are Agricultural Economics, Rural Development, and Tourism in rural and natural areas.
The high elasticity for the lowest segment indicates that investments in high quality grape are more valuable here, probably because of the more heterogeneous quality of the final products. This homogeneity did not allow the perfect estimation of the inefficiency parameters; however, we believe the results are methodologically sound and realistic.
The aim of this study is to observe the reasons why producers engage in a product differentiation process from a supply perspective, purely on the economic rationale that stimulates them to enter different segments.
Or it could go forward (downstream), leading the firm to buy a distributor in the industry. In these circumstances, there are a number of alternatives that firms may want to consider: Long-term contractual arrangements, franchise agreement, or joint ventures may all be more advantageous. So I decided to revisit this, and add some additional material in order to create the ultimate guide to a PEST analysis. On the other hand, grapes used in the top segments already possess a high quality and homogeneous quality level, a feature observed in the intercepts, which are clearly higher for all wines Vitis vinifera varieties. In contrast, with mandatory, exclusive discrete labeling, there is a higher probability that the gains from integration will be maximized where countries mutually recognize each other's labeling standards.
Human resource – the activities associated with recruiting, development, and compensation of employees. She is currently Professor at the Federal University of Rio Grande do Sul in Brasil, researching on socio-economic development.
More precisely, companies were surveyed in the Region of Serra Gaucha (11 municipalities), in the municipality of Santa Maria in the Central Region, and the municipality of Santana do Livramento in the West Border Region. Increased Differentiation (V) Low Cost (C) The Efficient Frontier shown below has a convex shape due to diminishing returns* *Diminishing returns imply that when a firm has significant value built into its product offering, increasing value by a small amount requires significant additional costs. The survey process had the institutional support of IBRAVIN, who provided a list of contacts, and gave logistic support for the interview phase.
Using a different production function for different segments, it is possible to observe that through differentiation producers can optimise their use of inputs.
A firm with a low-cost structure, also may have to give up a lot of value to obtain further cost reductions. In the first initial step, moving from the Popular Basic to the Luxury Basic or Premium wines, bottling does not contribute to the final value of the product, as all wines appear in rather homogeneous packaging.
In fact, inputs have different value elasticity when used in the production of wines of distinct quality levels, and producers can maximise the overall benefit from the use of that input by supplying products in more than one segment.
On the other hand, other peculiar features of the final product such as labels and capsule gain relevance, so that higher expenditures in these attributes have a significant contribution to the final value of the wine. The main areas of interest are Agribusiness Chains, Agricultural Economics, and Quantitative Methods in Economics. Finally, expenditures in qualified labour are essential for the marketing of Premium wines, which require high skills to assure a valuable output. En particular, se muestra que el etiquetado discreto, armonizado y obligatorio no maximiza ganancias.
Information was gathered from all written records of the firms, or inquired from the owner or his representative.
This benefit of using quality grapes declines in top segments: the average level of this input is generally high and homogeneous, and further increases generate a diminishing value of output. Consequently, wines have been classified as coming from the Old World (traditional European and Middle Eastern producers), and New World (countries who developed their tradition in wine making more recently). Similarly, expenditures in packaging are extremely valuable in very low segments, while expenditures in embellishment (i.e. Energy is an essential input to increase the value of Popular Basic wines, indicating the importance of energy-using technology to positively contribute to the final value of the wine. Nonetheless, quality segmentation seems to have become more frequent in the New World, as it allows producers to compete in different segments of the market. Transport is a significant contributor for the final value of Luxury Basic wines, as an increase in expenditure in transport implies the possibility of reaching different markets and improving the final value of the output.
In this work, we use data from Brazilian wine producing firms located in the Vale dos Vinhedos, State of Rio Grande do Sul, a region producing about 90% of all Brazilian wine.
Finally, an increase in the value of other inputs (water, cleaning supplies, sewage treatment, paper, etc) increase the value of the output of Sparkling, Popular Basic and Luxury Basic. Labeling is one method for addressing the credence good problem, requiring a number of regulatory choices concerning the labeling regime: compulsoriness (mandated or voluntary), explicitness (discrete or continuous), and exclusiveness (only government labeling is available or private firms may also certify). Brazilian firms have recently started to differentiate products by origin-based quality signals; they supply the markets with multiple products and are increasing market segmentation.
In fact, the intercept of the production function is clearly higher for those varieties, while rather similar across the Luxury Basic, Premium and Sparkling categories. Beyond domestic regulation, labeling rules are also an important issue in trading relations among countries. Within this particular wine district, we estimate a production function for different wine categories, identifying the different factors contributing to the changing marketing strategy in the study area. As countries become more integrated economically, they typically have to agree on either harmonizing or mutually recognizing their rules concerning labeling and certification of credence goods.
Results indicate that vertical differentiation is a strategy pursued to optimise the economic efficiency of inputs.
As a result, producers can optimise their profits by producing in different segments, obtaining the best return from each input used.
Harmonization implies that when two countries integrate economically, an agreed upon standard applies in both countries.
A winemaker supplying all segments can count on the highest return for each input, hence optimising the use of his resources.
The low number of producers in the sample (55) does not allow a sufficiently good inference in the two top segments, Premium and Sparkling wines, thus making it difficult to draw any conclusive arguments. Entering a single segment could be valuable for producers who have a competitive advantage in a specific input (e.g.
Consequently, better estimation would require a larger number of observations for each segment. Likewise, any standard set in the latter country is recognized in the former country (Leebron, 1996; Lutz, 2000). Consequently, it appears that vertical differentiation in the wine market is the consequence of economic incentives focusing on efficiency, rather than political or economic rent. Consequently, this work only explains part of the rationale used by wine producers in structuring their marketing strategy.
In this paper we extend the institutional setting by allowing for the integration of two economies where they agree either to harmonize or mutually recognize their credence good labeling regulations. Apart from the Luxury Basic category, all other segments have very similar efficiency scores, which indicate that segmentation does not give substantial advantages in terms of economic efficiency. Further research in the area would be useful to explain better producers' behaviour in vertical and horizontal differentiation, both inside and outside the wine sector. Consequentemente, os vinhos sao classificados como provenientes do Velho Mundo (paises produtores tradicionais europeus e do medio oriente) e do Novo Mundo (paises com tradicao mais recente na producao de vinho). However, table 3 shows certain sub-segments actually decrease in efficiency with a further vertical differentiation: Icon and Ultra-premium are less efficient than Premium and Super-Premium.
Alternatively, if there is mandatory, exclusive, and discrete labeling, the probability of lower welfare gains depends on whether countries harmonize or mutually recognize their labeling standards.
Todavia, a segmentacao pela qualidade tem-se tornado mais frequente no Novo Mundo, ja que permite que os produtores possam competir em diferentes segmentos de mercado.
Neste trabalho usamos informacao relativa ao vinho brasileiro, produzido em empresas localizadas no Vale dos Vinhedos, Estado do Rio Grande do Sul, uma regiao que produz cerca de 90% de todo o vinho brasileiro.
As empresas brasileiras comecaram recentemente a diferenciar tambem os seus produtos com base na origem dos sinais de qualidade, oferecendo no mercado multiplos produtos especificos, aumentando, assim, a segmentacao do mercado.


Para esta regiao vinicola em particular, estimamos uma funcao de producao para diferentes categorias de vinho, identificando os diferentes fatores que contribuem para a estrategia de marketing na area em estudo. We introduce the structure of the basic model in section 2, followed in section 3 by derivation of equilibrium under autarky with perfect information about quality. Os resultados indicam que a diferenciacao vertical e uma estrategia utilizada para optimizar a eficiencia economica dos fatores. In section 4, we examine the case of North–North integration with perfect information, followed by an analysis of different possible creden a good labeling regimes.
Em particular, os gastos em fatores relacionados com o tipo de produto (por exemplo, a uva, o tipo de garrafa, etc.) sao particularmente importantes para os segmentos mais baixos, enquanto os gastos em fatores relacionados com a qualidade (por exemplo, o trabalho especializado) sao cruciais para os vinhos de alta qualidade. Then in section 5, we conduct the same analysis with respect to North–South integration. Por conseguinte, sugere-se que, no mercado do vinho, a diferenciacao vertical e mais consequencia de incentivos economicos baseados na eficiencia, do que baseados numa renda de origem politica ou economica.
Wine from the New World clearly differentiates from European traditions in the marketing strategy adopted.
On the other hand, producers in the New World have tended to favour marketing strategies based on the vine grape contained in their produce. While the first option corresponds to a mostly vertical product differentiation, the latter actually refers to mostly horizontal product differentiation. Consumers derive the same surplus from a good of a particular quality, but differ in their ability to pay.
The literature presents mixed evidence regarding the use of a vertical differentiation strategy in the wine sector. In the context of a wine market, AOC labelling corresponds to a specific form of vertical differentiation, which creates an association between land and wine production that is verified by a governmental institution to prevent information-related externalities (Hobbs, 2004). Finally, note that if goods of differing qualities were all priced at marginal cost, all consumers would choose the same (highest) quality, which is the standard definition of vertical differentiation (Tiróle, 1988). At stage 1, each firm decides to enter or not enter the market, incurring sunk costs ε upon entry. At stage 2, firms that have entered simultaneously choose their good's quality level, incurring the additional fixed costs for producing the chosen quality. On the other hand, AOC impose a production constraint on the production function that creates distortions in the trade market, limiting quality improvements and reducing economic welfare (Kerr, 2006). Nevertheless, several developing countries have started differentiating wines based on AOC models following the current debate within the WTO, particularly with regards to wine.
In particular, a policy that stimulates vertical differentiation based on a geographical link encourages local producers to invest in quality, increasing their presence in different segments of the market. Also, this restriction on income dispersion ensures that each consumer either purchases one unit of the differentiated good or is indifferent between purchasing the lowest quality and purchasing none.
This would mean that vertical differentiation would be a consequence of a rational behaviour aiming at optimising the revenue elasticity of all inputs used by producers, who engage in quality differentiation with a certain return of the extra costs this may entail. We test this by observing a sample of wines produced by a sample of firms in Brazil, a country that only recently adopted a policy protecting geographical indications in the wine market. The next section explains the industrial economic rationale behind product differentiation, followed by a description of the Brazilian wine sector.
The mid sections describe the econometric model used in the paper and the data collection process respectively, with results presented in the before last section.
Markets are generally characterised by a large amount of products supplied, and it is often the case that the same producers actually propose several different wines to the market. Consequently, producers have shown a very strong tendency to differentiate their offer horizontally, i.e.
This is the case of a differentiation by grape: different wines using different grapes are dissimilar, and it is not possible to establish a quality ranking, as the distinct sensory characteristics of the final products make them equally valuable to consumers. This argument also holds for wines made from the same grape, but from different countries, i.e.
This type of segmentation implies that producers differentiate their supply offering several alternative wines, which clearly differ in their quality level. This is the case of products using an AOC label, as well as producers marketing products in different price bands (see e.g. The Y axis represents the different quality levels, while the X axis indicates differentiation within similar quality categories, e.g. Also note that, given these prices, a consumer is indifferent between a good of quality u1 and no good when p1 = y. In this context, producers can choose whether only to focus on a horizontal dimension, or to expand vertically.
Most often, the strategy is mixed, supplying one or more good to different quality segments. Increasing quality increases sunk quality costs and increases price competition with the higher quality firm as discussed in Remark 1. If the other firm set its quality at this level, price competition drives firms' revenue to zero, given the assumption of zero variable production costs. Consequently, the optimal choice of the other firm is to increase quality to u2 in order to maximize profits π2. If the low–quality firm were to increase its quality from the minimum u to u1 = u2, price competition again results in both firms incurring a loss. If more than two firms enter, given the assumption of zero variable production costs, price competition ensures that all firms will produce the top–quality at a zero price, thereby making zero profits. Consequently, given sunk costs ε only two firms can enter and make a profit in equilibrium. With the increase in the population size from s to si, the high–quality firm's revenue function rotates upwards, resulting in an increase in the quality of good 2 to u2. Given u2, the low–quality firm's revenue function shifts out and rotates upwards, the quality of good 1 remaining the same at the minimum ui. All communication of quality occurs through a mandatory label that is administered and verified exclusively by a public agency.
Continuous labels communicate the exact level of quality while discrete labels merely communicate if quality meets or exceeds a particular quality threshold. We assume there are no economies of size in the costs of public certification, and that such costs are the same throughout the integrated economy.
Only the profit of the high–quality firm is different because it incurs labeling costs. Hence, continuous labeling does not distort firm choices so long as it is not too expensive. If the authorities choose a standard outside this interval, one or both firms earn negative profits and will not enter the integrated market. Hence, for a standard outside this interval, only one firm enters and the market collapses to the monopoly outcome of case NL.
Proposition 7 also points out that, as labeling costs rise, the interval the harmonized standard must fall within shrinks. This bodes well for consumers who purchase the low–quality good, who now pay a lower price. Consumers of the high–quality good also pay a lower price, but as was shown in Proposition 1, these consumers would rather have the higher quality and pay the higher price. For the low–quality firm, the loss of profits from a decrease in u2 is obvious after differentiation of (12') with respect to u2.
Consumers of the high–quality good welcome the increase, as they value the quality increase more than they are harmed by the price increase. The relaxed price competition inflates the low–quality firm's profits as they gain a higher price with no increase in production costs. Obviously if both countries' labeling standards fall in the required interval, with mutual recognition, the standard chosen will be that closest to the firm–preferred standard. In either case, the distributional implications of the chosen standard are the same as stated in Proposition 8. If both countries set a labeling standard outside this interval, one or both firms earn negative profits and will not enter the integrated market. As a result, only one firm enters and the market collapses to the monopoly outcome of case XL.
Under autarky, both North and South will be able to sustain two firms in equilibrium selling distinct qualities. In addition, assume that North and South mutually recognize each other's minimum–quality standard. In other words, the minimum–quality good in the South will be eliminated due to economic integration. Of course, North and South could harmonize their minimum quality standard to that of the North, in which case, the South's minimum–quality standard would be driven from the market by flat. Consumers of the high–quality good benefit as they value the quality increase more than they are harmed by the price increase. In this paper we extend the institutional setting by allowing for the integration of two economies where they agree to either harmonize or mutually recognize their credence good labeling regulations. Consumers are given greater choice, and competition between firms helps push down prices and, hence, improves welfare. In contrast, if the authorities use harmonized mandated, exclusive, and discrete labeling (MEDh), quality distortion may occur.
Quality distortion has distributional implications, with lower standards preferred by lower income consumers and higher standards preferred by higher income consumers and by the low–quality producing firm. Hence, discrete labeling offers the authorities a means to influence the distribution of welfare in the integrated economy. We do not repeat that discussion here, instead we conclude by noting that the results of the current paper are sensitive to the assumption that on integration, economies harmonize their labeling regulations, when in fact they may mutually recognize each other's existing labeling regimes.
However, mutual recognition of standards can affect the results in the case of mandatory, exclusive, discrete labeling (MEDmr). The key point is that compared to harmonization of standards, mutual recognition by countries of each other's labeling regimes actually increases the probability that the benefits of integration will be achieved. First, with mandatory continuous labeling (MEC), the welfare gains from integration are unaffected as there will be no incentive for firms to hire a private certifier. This follows from the fact that firms are already able to communicate their desired quality level perfectly via the mandated continuous label.




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