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Economic efficiency of members of protected designations of origin: sharing reputation indicators in the experience goods of wine and cheese

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Abstract

The aim of this paper is to analyse the economic efficiency of members of protected designations of origin (PDO). For the first time we analyse the value of PDO labels from the point of view of economic efficiency. The central hypothesis is that a PDO has a positive impact on the economic efficiency of its member companies and that this is because a PDO label is a collective reputation indicator that foments efficient investment in quality in terms of member returns. The methodology applied to test this hypothesis is based on data envelopment analysis to estimate economic efficiency, and econometric models to explain company efficiency through both the PDO label, as an indicator of collective reputation, and the characteristics of the company. The results obtained in the experience goods of wine and cheese in Spain show that PDO labels have a positive impact on economic efficiency. Additionally, the age and size of the company have a positive effect while the wage level of the company has a different influence on efficiency depending on the sector considered. Overall, the results reveal the importance of PDOs in industries in which the signal of reputation is not only reliant on the individual brands.

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Notes

  1. An earlier theoretical specification, collected in the incomplete information model (see Rosen 1974), assumes that consumers have access to low-cost or free information on the current quality of a product.

  2. Another theoretical position, which has not been empirically analysed, holds that the members of a public collective label, such as PDO, can be more inefficient than members of a private collective label due to their higher variable production costs (Bouamra-Mechemache and Chaaban 2010). Basically, public labels are governed by a different set of legislation and limitations to guarantee a certain quality; for example, regulation induces technology constraints linked to a specific processing requirement and production area. In contrast, companies in a private collective labelling scheme can improve their efficiency as they have less stringent technical and capacity requirements, which entail lower variable production costs.

  3. Our hypothesis follows the theoretical assumption that reputation plays an important role in assuring product quality in markets where consumers can only imperfectly judge the product quality after consumption. Thus, if reputation effects are absent in these markets, producers have incentives to reduce quality to make short terms gains; that is, a declining trend in reputation gives producers a license to free-ride on the collective reputation. However, to avoid this reduction in quality, products with a good reputation are sold with a price premium (Quagrainie et al. 2003); in fact, Shapiro (1983) showed theoretically that price premiums are needed for producers to invest in quality and reputation.

  4. Alternatively, the theoretical position of Fishman et al. (2008) holds that if the consumers’ perception of quality of a collective brand is determined by their experience of the quality of different members of the brand and if the supply of high quality requires high investment, members may have the incentive to adopt a free-riding attitude to the investments of the other members of the collective brand. In fact, if the costs are sustained by all the producers but incomes are shared amongst the members according to the quantity produced, with no regular controls or minimum quality standards, some companies can be led away from the path of virtue and reduce quality in order to minimise costs and maximise profits (Castriota and Delmastro 2008). In this way, “free-riding” can be affected by the number of companies and the production volume of the collective brand: when the number of member companies is not large, it is possible to perfectly track the investments of the members and identify members that do not invest, thus impeding “free riding”. And as the production volume increases in the collective brand so does the collective reputation effect (as the number of units whose quality is observed by consumers increases) and the incentives to invest, eliminating the incentive to free ride.

  5. Lack of information on cheese quality in Spain impedes the comparative analysis of average quality of PDO companies and the average quality of non-PDO companies.

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Authors and Affiliations

  1. Department of Marketing, Faculty of Economics, University of Alicante, Carretera de San Vicente, s/n, 03690, San Vicente del Raspeig, Alicante, Spain

    Ricardo Sellers-Rubio & Francisco J. Más-Ruiz

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  1. Ricardo Sellers-Rubio
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  2. Francisco J. Más-Ruiz
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Correspondence to Ricardo Sellers-Rubio.

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Sellers-Rubio, R., Más-Ruiz, F.J. Economic efficiency of members of protected designations of origin: sharing reputation indicators in the experience goods of wine and cheese. Rev Manag Sci 9, 175–196 (2015). https://doi.org/10.1007/s11846-014-0124-x

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