While there is evidence that production networks serving highly regulated markets can transmit labor and environmental standards (LES) to under-regulated regions, the cost distribution of complying with LES is sorely understudied. This paper provides a theoretical model of multi-product retailers selling partially substitutable goods and outsourcing production to upstream suppliers. It investigates the effects of labor and environmental standards driven by consumers: under what conditions do they result in an uneven distribution of effort, and hence cost of compliance, between producers and retailers? Results show that when products are highly substitutable a multi-product retailer can shift the cost of compliance with LES on to its suppliers. A single-product retailer would not be able to completely shift those costs on to suppliers. Product substitutability drives the result as a change in product characteristics affects demand of its substitutes: a source of bargaining power for a multi-product retailer. Product substitutability could lead well-meaning LES to exacerbating producers vulnerability.
Who gets the surplus in value chains: development policies implications of value chain governance
(with F. Mayer and A. Pfaff)
Major development agencies provide poor countries with support to jumpstart their involvement into Global Value Chains (GVCs). This paper investigates how the division of profits between producers involved in GVCs depends on horizontal competition (between firms at the same production stage) and vertical competition (between firms at different stages of production as driven by GVC governance). We employ a Cournot model adapted to multistage production to generate closed-form solutions of profit shares in a linear value chain. Results show that the interaction between horizontal and vertical competition impacts value captured by firms along GVCs. Vertical market power is a necessary but not sufficient condition to benefit from common development policies relative to other firms. We evaluate upstream and downstream changes in trade costs, horizontal competition, elasticity of demand and supply. We conclude that without considering the entire industry structure, trade-based development policies and competition policies might fail to meet their stated objectives and overwhelmingly benefit countries other than their targets.