Persuading eco-conscious consumers by disclosing environmental quality information

Firms are increasingly adopting voluntary tools, such as eco-labels, to communicate the environmental quality of products in response to rising consumer concerns and to justify green premiums. Utilizing Bayesian persuasion theory, we investigate how a profit-maximizing firm can strategically disclose information about environmental quality and pricing to persuade eco-conscious consumers. Our model addresses the dual uncertainties present in green markets: the environmental attributes on the supply side and consumers’ environmental preferences on the demand side. We find that partial disclosure is optimal when a significant number of consumers have strong environmental preferences and positive performance expectations, allowing the firm to craft information structures that downplay low-quality signals while enhancing the credibility of high-quality ones, thus improving pricing effectiveness. Conversely, when eco-conscious consumers are scarce or pessimistic, a uniform pricing strategy is preferable, making information withholding the best approach, as disclosure does not add value. Additionally, we explore the effects of price unobservability, which can reduce the firm’s dependence on consumer segment characteristics in shaping disclosure strategies and, under certain conditions, may benefit consumers by limiting the firm’s ability to extract surplus. Our findings offer guidance for firms on the flexible use of voluntary disclosure tools in sustainable markets marked by fluctuating product eco-quality and unpredictable consumer preferences.