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Abstract

The market for organic products increases continuously over time. Because con- sumers are willing to pay a premium for organic goods, firms may have an interest in developing organic production strategies and entering a profitable market segment. The objective of this paper is to assess the profitability of such a strategy and to de- termine how the value added created by the existence of 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 relative 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 manu- facturers to achieve more bargaining power relative to retailers and hence to obtain a higher share of total margins.

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