Sustainable Production Choices and Price Signaling

Consumers increasingly care about the environmental and social responsibility of the production processes used by firms, yet these processes often remain unobservable, even after consumption. We develop a simple model in which firms select either a green or a brown production technology before competing and signaling through prices. Firms observe each other's production choices, while consumers observe only prices. We show that, in the payoff-dominant equilibrium, prices signal when at least one firm produces green, avoiding Bertrand competition. Counterintuitively, raising consumers' environmental concerns or eliminating the information asymmetry may discourage green production and reduce welfare.