Advertisement

Environmental and Resource Economics

, Volume 31, Issue 1, pp 1–19 | Cite as

Price Competition and Product Differentiation When Consumers Care for the Environment

  • Klaus ConradEmail author
Article

Abstract

Increasing environmental awareness may affect the pleasure of consuming a good for which an environment friendly substitute is available. In this paper, we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spatial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game, where at the first stage each firm chooses the characteristic of its product. At the second stage, each firm chooses its price. Equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics, we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way, we determine the choice of environmental characteristics by a welfare maximizing authority. The objective of the paper is to understand the environmental quality choices facing firms and to provide policies that would align private choices with the social optimum.

Keywords

environmental awareness green market product differentiation quality competition 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Akerlof, G. 1997‘Social Distance and Social Decision’Econometrica6510051027Google Scholar
  2. Andreoni, J. 1990‘Impure Altruism and Donations to the Public Good: A Theory of Warm Glow Giving’The Economic Journal100464477Google Scholar
  3. Arora, S., Gangopadhyay, S. 1995‘Towards a Theoretical Model of Voluntary Overcompliance’Journal of Economic Behavior and Organization28289309Google Scholar
  4. Bansal, S., Gangopadhyay, S. 2003‘Tax/subsidy Policies in the Presence of Environmentally Aware Consumers’Journal of Environmental Economics and Management45333355Google Scholar
  5. Crampes, C., Hollander, A. 1995‘Duopoly and Quality Standards’European Economic Review397182Google Scholar
  6. Cremer, H., Thisse, J. F. 1999‘On the Taxation of Polluting Products in a Differentiated Industry’European Economic Review43575594Google Scholar
  7. D’Aspremont, C., Grabszewicz, J. J., Thisse , J. F. 1979‘On Hotelling’s “stability in competition”’Econometrica4711451149Google Scholar
  8. Eriksson, C. 2004‘Can Green Consumerism Replace Environmental Regulation? – A Differentiated-Products Example’Resource and Energy Economics26281293Google Scholar
  9. Gabszewicz, J., Thisse, J. F. 1997‘Price Competition, Quality and Income Disparities’Journal of Economic Theory20340359Google Scholar
  10. Greaker, M. (2003), ‘Eco-Labels, Trade and Protectionism’, Paper presented at the EAERE Conference in Bilbao.Google Scholar
  11. Grilo, I., Shy, O., Thisse , J. F. 2001Price Competition when Consumer Behavior is Characterized by Conformity or Vanity’Journal of Public Economics80385408Google Scholar
  12. Hotelling, H. 1929‘Stability in Competition’Economic Journal394157Google Scholar
  13. Kriström, B. 1999‘Contingent Valuation’Bergh, C. J. M. eds. Handbook of Environmental and Resource Economics.E. Elgar Cheltenham, UKGoogle Scholar
  14. Lombardini-Riipinen, C. (2003), ‘Endogenous Emission Standards in a Duopoly that is Vertically Differentiated in Environmental Quality’, Paper presented at the EAERE Conference in Bilbao.Google Scholar
  15. Moraga-González, J. L., Padrón-Fumero, N. 2002‘Environmental Policy in a Green Market’Environmental and Resource Economics22419447Google Scholar
  16. Motta, M., Thisse, J. F. 1999‘Minimum Quality Standards as an Environmental Policy: Domestic and International Effects’Petrakis, E.Sartzetakis, E.Xepapadeas, A. eds. Environmental Regulation and Market PowerE. ElgarCheltenham, UKGoogle Scholar
  17. Ronnen, U. 1991‘Minimum Quality Standards, Fixed Costs, and Competition’Rand Journal of Economics22490504Google Scholar
  18. Shaked, A., Sutton, J. 1982‘Relaxing price competition through product differentiation’The Review of Economic Studies49313Google Scholar
  19. Tirole, J. 1988The Theory of Industrial OrganizationMIT PressCambridge, MAGoogle Scholar

Copyright information

© Springer 2005

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of MannheimMannheimGermany

Personalised recommendations