Green Consumerism and Firms’ Environmental Behaviour Under Monopolistic Competition: A Two-Sector Model

We investigate the pro-environmental behavior of green firms in a context where consumers value the goods’ eco-quality features. We present a two-sector monopolistic competition model with green and brown goods displaying both horizontal and vertical differentiation. Using analytical and quantitative techniques, we derive the optimal eco-quality level selected by green firms and the industry structure both in the short- and long-run equilibrium. We then study the effectiveness of three policy tools (green incentives, the imposition of a minimum quality standard, and green awareness campaigns) with respect to the policymaker’s objective of increasing the overall level of greenness, which we measure through a specific indicator. We find that each policy alone is apt to stimulate an increase in the greenness intensity compared to the unregulated equilibrium. Yet, their side effects in terms of market structure and the possibility that the intensity of application of a single tool may hit budgetary, political, or social limits call for a combination of two or more policies to overcome the above limits and get a higher overall level of greenness than that resulting from just one of them.