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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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References

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  1. Don Fullerton, 2001. "A Framework to Compare Environmental Policies," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 224-248, October.
  2. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, vol. 5(1), pages 19-32, January.
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  8. Ambec, Stefan & Barla, Philippe, 2002. "A theoretical foundation of the Porter hypothesis," Economics Letters, Elsevier, vol. 75(3), pages 355-360, May.
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  10. 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.
  11. 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.
  12. 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.
  13. Feichtinger, Gustav & Hartl, Richard F. & Kort, Peter M. & Veliov, Vladimir M., 2005. "Environmental policy, the porter hypothesis and the composition of capital: Effects of learning and technological progress," Journal of Environmental Economics and Management, Elsevier, vol. 50(2), pages 434-446, September.
  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. 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.
  16. 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.
  17. 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.
  18. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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  20. 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.
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Citations

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Cited by:
  1. Bernard, Sophie, 2011. "Remanufacturing," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 337-351.
  2. G. F. Gori & L. Lambertini & A. Tampieri, 2012. "Trade Costs, FDI incentives, and the Intensity of Price Competition," Working Papers wp810, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Jesse Matheson, 2011. "Prices and social behavior: A study of adult smoking in Canadian Aboriginal communities," Discussion Papers in Economics 11/50, Department of Economics, University of Leicester, revised Dec 2012.
  4. Kurtyka, Oliwia & Mahenc, Philippe, 2011. "The switching effect of environmental taxation within Bertrand differentiated duopoly," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 267-277, September.
  5. Ambec, Stefan & Cohen, Mark & Elgie, Stewart & Lanoie, Paul, 2010. "The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness?," IDEI Working Papers 655, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. L. Lambertini & A. Tampieri, 2012. "The Environmental Impact of Bertrand and Cournot Duopolies. A Cautionary Note," Working Papers wp812, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Maria José Gil-Moltó & Dimitrios Varvarigos, 2011. "Emission Taxes and the Adoption of Cleaner Technologies: The Case of Environmentally Conscious Consumers," Discussion Papers in Economics 11/49, Department of Economics, University of Leicester.
  8. L. Lambertini & A. Tampieri, 2012. "On the Emergence of Overcompliance with Endogenous Environmental Standards and Patronising Consumers," Working Papers wp847, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Heindl, Peter & Lutz, Benjamin, 2012. "Carbon management: Evidence from case studies of German firms under the EU ETS," ZEW Discussion Papers 12-079, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  10. Christos Constantatos & Markus Herrmann, 2011. "Market Inertia and the Introduction of Green Products: Can Strategic Effects Justify the Porter Hypothesis?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 50(2), pages 267-284, October.
  11. Myriam Anna Scaringelli, 2011. "Commercio Internazionale E Ambiente: Un’Analisi A Livello Provinciale," Quaderni DSEMS 06-2011, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

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