Welfare Effects of Eco-label Proliferation: Too Much of a Good Thing?

Given that existing food eco-labels are still not well defined in consumers’ experience, there is potential for new labels to generate more confusion. Consumers incur fixed costs to learn about a label’s meaning. Market shares for existing certifications may be eroded by perceptions that new products are good substitutes for them. The eco-label certifier must respond with information that reduces these costs or lose consumer and producer confidence in the label. Using a model of spatial competition in attribute space, the effect of search costs and educational expenditures on market share and price for competing certifiers is simulated. The results show that educational spending and/or improvements in efficiency of educational spending increase market share when consumer search costs are positive. Underspending on consumer education reduces the price a firm is able to charge within its market niche. The consumer and producer surplus effects of new certifier entry are calculated using a simulation model of market segmentation. Under the assumptions made, segmentation reduces producer surplus while keeping consumer surplus about the same. Market prices decline due to associated search costs as share is captured from the conventional segment by eco-labels. Within segments, consumers gain at the expense of producers, even if market share is maintained by existing eco-labelers after entry of new labels, and even if consumer search costs decline.