Graduate Institute of International and Development Studies Working Paper No. 10/2010
Geographical Indications (GIs) for products (Basmati rice, Champagne sparkling wine, Antigua coffee, etc.) were regulated at the international level in 1995 (WTO TRIPS Agreement, Part II, Section 3). This paper sets a general framework of analysis for GI-labeled goods, based on the modeling of a GI as a club asset (partial excludability and no rivalry in benefits to the firms that lawfully label their products with the GI). A model of club reputation is developed which includes Shapiro (1982) and Winfree & McCluskey (2005) as special cases. Reputation is assumed to be traceable through the GI label; quality is endogenously determined at the firm level, with reputation as the state variable. In contrast with previous research, it is shown that the TRIPS legal construct around GIs is potentially compatible with an equilibrium involving a self-fulfilling level of quality (and reputation) that is above the minimum, under the condition that the GI club has a reduced membership of firms. However, the establishment of a minimum level of quality is still the first best policy to improve firm profits. It is also shown that under bottom-up firm-driven processes of club formation (maximization of firm profits), firm levels of quality and profits are higher, and levels of club membership are lower, than under top-down State-driven processes (maximization of club profits). When quality is taken as exogenous, the model evolves into a static partial equilibrium framework, where the GI is subject to potential dilution phenomena due to membership crowding and oversupply. GI-related expenses, output, membership, and club finance are all determined simultaneously. It is shown that under partial rivalry in benefits, both output and membership are reduced, in an equilibrium that approaches the cartel equilibrium. State subsidization is shown to lead to potential inefficiencies stemming from price and incentive distortions. The geographical confinement of output is shown to impact factor prices and quantities. Finally, issues concerning potential monopsonistic concerns and the replication of GIs are briefly sketched.