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Strategic quality competition and the Porter Hypothesis

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  • Andr, Francisco J.
  • Gonzlez, Paula
  • Porteiro, Nicols

Abstract

This paper offers new support for the Porter Hypothesis within the context of a quality competition framework. We use a duopoly model of vertical product differentiation in which two firms simultaneously choose to produce either a high (environmentally friendly) quality or low (standard) quality variant of a good, before engaging in price competition. In this simple setting, we show that a Nash equilibrium of the game featuring the low-quality good can be Pareto dominated by a different strategy profile, in which both firms opt in favour of the "green" product. Our analysis demonstrates that, in such a case, both firms stand to profit from the introduction of a rule penalizing any firm refusing to produce the environmentally friendly product. We also find that consumers themselves may benefit from such regulations. This is always the case when shifting from low quality to high-quality production brings about a cost-efficiency improvement.

Suggested Citation

  • Andr, Francisco J. & Gonzlez, Paula & Porteiro, Nicols, 2009. "Strategic quality competition and the Porter Hypothesis," Journal of Environmental Economics and Management, Elsevier, vol. 57(2), pages 182-194, March.
  • Handle: RePEc:eee:jeeman:v:57:y:2009:i:2:p:182-194
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    More about this item

    Keywords

    Environmental quality Vertical differentiation Prisoner's dilemma Environmental regulation Porter Hypothesis;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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