The honest truth about true pricing

True pricing has progressed from an abstract notion to a real life phenomenon as a way to make consumers aware of the genuine costs to society of products. Our paper analyzes the impact of true prices on competition. Our model uses a straightforward differentiated Bertrand set-up where consumers can choose to pay the true price or the normal price. There are consumers who strongly prefer not to cause externalities. These consumers will opt to pay the true price. Other consumers receive less disutility of causing externalities. They will pay the normal price. Our findings are that setting the true price can be an equilibrium strategy for one or both firms. True prices can be welfare enhancing, but it comes at a cost. True prices harm consumers that do not value external effects as it raises the normal price. A comparison of true prices with taxation of the external effect shows that both can be socially optimal. Taxation is better because it covers both types of consumers, and worse because it overcorrects in the presence of market power. The paper demonstrates the value of analyzing competitive effects of environmental initiatives.