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Strategic Quality Competition and the Porter Hypothesis

Author

Listed:
  • 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.

Suggested Citation

  • Francisco J. André & Paula González & Nicolás Porteiro, 2007. "Strategic Quality Competition and the Porter Hypothesis," Working Papers 07.03, Universidad Pablo de Olavide, Department of Economics.
  • Handle: RePEc:pab:wpaper:07.03
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    References listed on IDEAS

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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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