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Abstract

The purpose of this paper is to investigate the economic rationale underlying collective management and supply control mechanisms in European protected designations of origin (PDOs), with a focus on the French Comte cheese market. The argument is based on the presence of imperfect competition at the processing stage of the industry. Assuming that processors are able to exercise both oligopsony power in the procurement of the agricultural output and oligopoly power in the sale of the final product, I show that vertical integration between upstream producers and downstream processors is mutually beneficial as long as the integrated industry is able to exercise some degree of seller market power. I characterize instances where consumers also win from the integration process, so that the vertically integrated monopolist is less detrimental to social welfare than the separated industry. Even when consumers lose, the deadweight loss due to market power by the integrated monopolist may not be significantly higher than that arising from the joint exertion of oligopsony and oligopoly power by a separated processing sector. This argument provides a potential rationale to the government-sanctioned production control scheme currently in place in the French Comte cheese market.

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