Abstract
We investigate interest groups’ incentives to inform consumers about the damaging practices of firms and the impact such an IG has on firms’ technology choices. The IG aims to reduce the production of some bad, say pollution. It can at a cost investigate firms’ production practices and inform consumers about its findings. Since consumers care about the environment, revealing differences in pollution levels between firms leads to vertical product differentiation. The information, by shifting sales from ‘dirty’ towards ‘clean’ firms, reduces pollution. We show that the IG is most inclined to investigate firms in relatively competitive industries and that the threat of being unmasked as a polluter prompts dirty firms to adopt a clean technology.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
A large literature reports empirical evidence that consumers care about environmental attributes of a product. See e.g. chapter 1 of Kuhn (2005) and the references mentioned therein.
EDF also informs consumers about the health risks associated with eating various fish species. See http://seafood.edf.org/ (accessed June 16, 2013).
For example, the website of Seafood Watch states that it “encourage[s] restaurants, distributors and seafood purveyors to purchase from sustainable sources”. See http://www.montereybayaquarium.org/cr/cr_seafoodwatch/sfw_aboutsfw.aspx?c=ln (accessed June 16, 2013).
Working paper available at http://www.rug.nl/staff/a.van.der.made/projects.
In his model the number of potential buyers is very large compared to the number of sellers.
Cheong and Kim also show that the equilibrium probability that a given seller discloses its quality is decreasing in the number of sellers. This contrasts with the result derived in the working paper version of this paper that information provision by an IG becomes more likely as the number of firms increases.
If information is not verifiable, then agents might still be able to divulge (part of) their private information by resorting to signaling. Yet, in our model firms lack the means to signal anything regarding damage levels or technology choices.
It is assumed that consumers are homogeneous in this respect. We think that relaxing this assumption would complicate the analysis without giving further insights.
See for instance Andreoni (1990) for a discussion of impurely altruistic preferences.
The assumption that the IG cannot opt to investigate only one firm is rather innocuous: as long as the IG enjoys economies of scale when investigating firms it is never optimal to investigate only one firm. The reason is that because damage levels and prices enter a consumer’s utility linearly, the reduction in expected damages is linear in the number of firms that the IG investigates.
Formally, Banks and Sobel (1987) coin a sequential equilibrium divine if it is supported by beliefs in some set of beliefs \(\Gamma ^*\). The set \(\Gamma ^*\) is determined by an iterative procedure. In the present context \(\Gamma ^*\) is a singleton that is obtained after one iterative step. Details available from the author upon request.
See the “Appendix” for proofs that these conditions do indeed ensure that in equilibrium the market is covered and both firms are active.
If a firm has not been investigated by the IG, then it could try to signal a relatively low damage level by deviating from its equilibrium price specified in (5). However, a firm would always, i.e. irrespective of its true damage level, want to mimic the behaviour of a firm with the damage level yielding the highest equilibrium profit, i.e. charge that firm’s equilibrium price \(\hat{p}\). Because of this incentive, consumers’ beliefs regarding the firm’s damage level after observing \(\hat{p}\) do not differ from the beliefs they entertained prior to observing the prices. This renders signalling impossible. Formally, the subgame starting in stage three does not have separating equilibria, only (fully) pooling equilibria. Note that divinity is not required to arrive at this conclusion regarding equilibrium play.
Condition 2 ensures that the profits in (7) are strictly decreasing in own expected damage levels.
Of course, if \(\lambda =0\), then firm \(i\)’s expected profit does not depend on its damage level.
If \(\bar{d}_i=0\ (\bar{d}_i>D)\), then firm \(i\) always (never) adopts the clean technology.
The uniform distribution on \([0,D]\) and any distribution that first order stochastically dominates that uniform distribution satisfies (11).
A cumulative distribution function is negatively skewed if the bulk of its probability mass lies to the right of its mean. If, for instance, \(F(u)=\frac{u^2}{D^2}\) and thus \(f(u)=\frac{2u}{D^2}\), then \(F(\cdot )\) is too negatively skewed:
$$\begin{aligned} d-2\int \limits _0^du\,\mathrm{d}\frac{u^2}{D^2}=d-\frac{4d^3}{3D^2}, \end{aligned}$$which is negative for \(d\) sufficiently close to \(D\).
The function \(\varvec{1}_S(\cdot )\) is the indicator function of the set \(S\!: \varvec{1}_S(x)={\left\{ \begin{array}{ll}0&{}\text {if}\quad x\not \in S\\ 1&{}\text {if}\quad x\in S\end{array}\right. }\).
Of course, \(V_1(\delta _1=0;\delta _2(\cdot ),K)\) depends on the damage level \(d_1\) if \(K=\{1,2\}\).
See the “Appendix” for a detailed derivation.
One also needs to show that firms do not want to preempt any investigations by the IG by choosing a very low threshold. See the proof of Proposition 1.
If \(c>R(D)\), then the IG never investigates the firms, the firms always stick to their dirty technologies, and the standard Hotelling equilibrium \((p_1^*=p_2^*=t,\, \bar{x}^*=\frac{1}{2})\) obtains. If \(c=R(D)\), then there are multiple equilibria as long as \(C\ne \psi (D)\): a whole range of values of \(\lambda \) can then support an equilibrium. If (11) fails to hold, then an equilibrium akin to the one presented in Proposition 1 still prevails. Yet, since \(R^{-1}(\cdot )\) does not exist if \(R(\cdot )\) is non-monotonic, the analysis becomes more complicated if (11) does not hold. Because not much additional insight can be gained from this case, we refrain from analyzing it.
The decrease in \(\lambda ^*\) affects \(\frac{d_i}{3}-\frac{\frac{1}{2}d_i^2-(1-q)\hat{\mu }d_i}{9t}\), whereas the impact of an increase in \(t\) is confined to the second term of this expression.
Lyon and Maxwell (2004) coin this strategy the bear hug. They indeed argue that this subsidization reduces the informativeness of the IG’s message.
See https://www.cdproject.net/en-US/Pages/HomePage.aspx (accessed August 23, 2012).
The interaction between the number of firms and the IG’s incentives to investigate those firms is studied in the working paper version (van der Made 2011) of this paper.
References
Andreoni J (1990) Impure altruism and donations to public goods: a theory of warm-glow giving. Econ J 100:464–477
Banks J, Sobel J (1987) Equilibrium selection in signaling games. Econometrica 55:647–661
Baron D (2001) J Econ Manag Strateg. Private politics, corporate social responsibility, and integrated strategy 10:7–45
Cheong I, Kim J-Y (2004) Costly information disclosure in oligopoly. J Ind Econ 52:121–132
Feddersen T, Gilligan T (2001) Saints and markets: activists and the supply of credence goods. J Econ Manag Strateg 10:149–171
Grossman S (1981) The informational role of warranties and private disclosure about product quality. J Law Econ 24:461–483
Heijnen P (2013) Informative advertising by an environmental group. J Econ 108:249–272
Jovanovic B (1982) Truthful disclosure of information. Bell J Econ 13:36–44
Kennedy P, Laplante B, Maxwell J (1994) Pollution policy: the role for publicly provided information. J Environ Econ Manag 26:31–43
Kirchhoff S (2000) Green business and blue angels. Environ Resour Econ 15:403–420
Kuhn M (2005) The greening of markets. Edward Elgar, Cheltenham
Lyon T, Maxwell J (2004) Astroturf: interest group lobbying and corporate strategy. J Econ Manag Strateg 13:561–597
Mason C (2006) An economic model of ecolabeling. Environ Model Assess 11:131–143
Milgrom P (1981) Good news and bad news: representation theorems and applications. Bell J Econ 12:380–391
Milgrom P, Roberts J (1986) Relying on the information of interested parties. RAND J Econ 17:18–32
Petrakis E, Sartzetakis E, Xepapadeas A (2005) Environmental information provision as a public policy instrument. Contrib Econ Anal Policy 4, Article 14
Shaked A, Sutton J (1982) Relaxing price competition through product differentiation. Rev Econ Stud 49:3–13
van der Made A (2011) Information provision by interest groups. Working paper
Author information
Authors and Affiliations
Corresponding author
Additional information
This paper has benefited substantially from discussions with Lambert Schoonbeek, Marco Haan, José Luis Moraga-González, and Remco van Eijkel. I would also like to thank two anonymous referees, the editor, attendees at EAERE 2008, EEA-ESEM 2008, ASSET 2008, NAKE Research Day 2007, and seminar participants at the University of Groningen. Financial support from The Netherlands Organization for Scientific Research (NWO) is gratefully acknowledged.
Electronic supplementary material
Below is the link to the electronic supplementary material.
Rights and permissions
About this article
Cite this article
van der Made, A. Information Provision by Interest Groups. Environ Resource Econ 58, 649–664 (2014). https://doi.org/10.1007/s10640-013-9714-3
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10640-013-9714-3