Price Competition and Product Differentiation when Consumers Care for the Environment
AbstractIncreasing environmental awareness may affect the pleasure of consuming a good for which an environmental friendly substitute is available. When deciding to buy differentiated products, a compromise is sometimes made between preferred characteristics of the good and its environmental properties. 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. The unique 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 determined the choice of environmental characteristics by a welfare maximizing authority. The result of this analysis is that characteristics differ under private decision making and social one. It can be shown, however, that it is possible to choose environmental policy instruments in order to stimulate private firms to produce the social optimal qualities.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.66.
Date of creation: Jul 2003
Date of revision:
Price competition; Quality competition; Environmental awareness; Environmentally friendly products;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-COM-2004-09-12 (Industrial Competition)
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