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Strategic Quality Competition and the Porter Hypothesis

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  • Francisco J. André

    ()
    (Department of Economics, Universidad Pablo de Olavide)

  • Paula González

    ()
    (Department of Economics, Universidad Pablo de Olavide)

  • Nicolás Porteiro

    ()
    (Department of Economics, Universidad Pablo de Olavide)

Abstract

In this paper we provide a theoretical foundation for the Porter hypothesis in a context of quality competition. We use a duopoly model of vertical product differentiation where firms simultaneously choose the environmental quality of the good they produce (which can be either high or low) and, afterwards, engage in price competition. In this simple setting, we show that a Nash equilibrium of the game with low quality could be Pareto dominated by another strategy profile in which both firms produce the high environmental quality good. We then show how, in this case, the introduction of a penalty to any firm that produces the low environmental quality can result in an increase in both firms' profits. The impact of the policy on consumers depends on the effect of a quality shift on the cost structure of firms.

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File URL: http://www.upo.es/serv/bib/wps/econ0703.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 07.03.

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Length: 27 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:pab:wpaper:07.03

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Keywords: environmental quality; vertical differentiation; prisoner's dilemma; environmental regulation; Porter hypothesis.;

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  1. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche 9128, Universite de Montreal, Departement de sciences economiques.
  2. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, vol. 5(1), pages 19-32, January.
  3. Feichtinger, G. & Hartl, R.F. & Kort, P.M. & Veliov, V., 2003. "Environmental Policy, the Porter Hypothesis and the Composition of Capital: Effects of Learning and Technological Progress," Discussion Paper 2003-61, Tilburg University, Center for Economic Research.
  4. Xepapadeas, A. & Zeeuw, A.J. de, 1998. "Environmental Policy and Competitiveness: The Porter Hypothesis and the Composition of Capital," Discussion Paper 1998-38, Tilburg University, Center for Economic Research.
  5. Don Fullerton, 2001. "A Framework to Compare Environmental Policies," NBER Working Papers 8420, National Bureau of Economic Research, Inc.
  6. C. Lombardini-Riipinen, 2005. "Optimal Tax Policy under Environmental Quality Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(3), pages 317-336, November.
  7. Ambec, Stefan & Barla, Philippe, 2002. "A theoretical foundation of the Porter hypothesis," Economics Letters, Elsevier, vol. 75(3), pages 355-360, May.
  8. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Simpson, R. David & Bradford, Robert III, 1996. "Taxing Variable Cost: Environmental Regulation as Industrial Policy," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 282-300, May.
  10. Robert D. Mohr & Shrawantee Saha, 2008. "Distribution of Environmental Costs and Benefits, Additional Distortions, and the Porter Hypothesis," Land Economics, University of Wisconsin Press, vol. 84(4), pages 689-700.
  11. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc.
  12. Karen Palmer & Wallace E. Oates & Paul R. Portney, 1995. "Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 119-132, Fall.
  13. Mari Rege, 2000. "Strategic Policy and Environmental Quality: Helping the Domestic Industry to Provide Credible Information," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(3), pages 279-296, March.
  14. Amacher, Gregory S. & Koskela, Erkki & Ollikainen, Markku, 2004. "Environmental quality competition and eco-labeling," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 284-306, March.
  15. Buchanan, James M & Tullock, Gordon, 1975. "Polluters' Profits and Political Response: Direct Controls Versus Taxes," American Economic Review, American Economic Association, vol. 65(1), pages 139-47, March.
  16. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  17. Maloney, Michael T & McCormick, Robert E, 1982. "A Positive Theory of Environmental Quality Regulation," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 99-123, April.
  18. Hart, Rob, 2004. "Growth, environment and innovation--a model with production vintages and environmentally oriented research," Journal of Environmental Economics and Management, Elsevier, vol. 48(3), pages 1078-1098, November.
  19. Mohr, Robert D., 2002. "Technical Change, External Economies, and the Porter Hypothesis," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 158-168, January.
  20. Greaker, Mads, 2006. "Spillovers in the development of new pollution abatement technology: A new look at the Porter-hypothesis," Journal of Environmental Economics and Management, Elsevier, vol. 52(1), pages 411-420, July.
  21. Michael E. Porter & Claas van der Linde, 1995. "Toward a New Conception of the Environment-Competitiveness Relationship," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 97-118, Fall.
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