Product Bans as Protectionism: The Maggi Scare

Governments can implement industrial policy by withdrawing operational permits from specific firms. These actions, in the form of product or firm bans, may affect market competition and possibly the demand for the whole product category. We analyze the ban of Nestlé's Maggi, the largest producer of instant noodles in India, for alleged non-compliance with health safety standards. Maggi returned to the stores six months later when The High Court at Bombay ruled the ban unjustified. We show the presence of negative spillovers to competitors, which led them to decrease their sales in the first months of the ban. We also document substantial heterogeneity in consumers' responses to the ban according to political preferences and government alignment. Using a structural model of consumer and firm behavior, we separately identify demand and supply responses to the ban. Through counterfactuals, we show that the ban had a substantial impact on consumer surplus. Further, 45 percent of the overall effect was due to spillovers of the ban to the entire instant noodles category, while the rest resulted from changes in market structure.


This talk is presented by the Applied Microeconomics/Industrial Organization Seminar, sponsored by the Department of Economics with generous gifts given through the Jean Coven Speakers Fund in Economics and the Economics Strategic Fund.