IDEAS home Printed from https://ideas.repec.org/p/smu/ecowpa/1001.html
   My bibliography  Save this paper

Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation

Author

Listed:
  • Aditi Sengupta

    (Southern Methodist University)

Abstract

I consider an imperfectly competitive industry where firms signal the environmental attribute of their production technology through prices to environmentally conscious consumers that are not informed about the environmental damage caused by firms but are willing to pay more for "cleaner" products. I analyze the effect of changes in the level of environmental regulation on signaling behavior of firms and their incentive to develop cleaner technology. While cleaner firm types charge higher prices when regulation is weak, higher price does not signal better environmental performance when regulation is sufficiently stringent. With weak regulation, a monopolist has absolutely no incentive to invest in the development of a potentially less damaging technology even though consumers are willing to pay more for the product. This incentive is positive when regulation is strong enough. In a more competitive market structure (duopoly with price competition), firms may have strategic incentive to invest even when regulation is weak.

Suggested Citation

  • Aditi Sengupta, 2010. "Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation," Departmental Working Papers 1001, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1001
    as

    Download full text from publisher

    File URL: https://ftp1.economics.smu.edu/WorkingPapers/2010/SENGUPTA/Sengupta-2010-02.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
    2. Hwang, Yun Jae & Roe, Brian E. & Teisl, Mario F., 2006. "Does Price Signal Quality? Strategic Implications of Price as a Signal of Quality for the Case of Genetically Modified Food," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 9(1), pages 1-22.
    3. Sartzetakis, Eftichis & Xepapadeas, Anastasios & Petrakis, Emmanuel, 2008. "The role of information provision as a policy instrument to supplement environmental taxes: Empowering consumers to choose optimally," MPRA Paper 12083, University Library of Munich, Germany.
    4. Sedjo, Roger & Swallow, Stephen, 1999. "Eco-Labeling and the Price Premium," RFF Working Paper Series dp-00-04, Resources for the Future.
    5. Cremer, Helmuth & Thisse, Jacques-Francois, 1999. "On the taxation of polluting products in a differentiated industry," European Economic Review, Elsevier, vol. 43(3), pages 575-594, March.
    6. Mari Rege, 2000. "Strategic Policy and Environmental Quality: Helping the Domestic Industry to Provide Credible Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 15(3), pages 279-296, March.
    7. Toshihiro Uchida, 2007. "Information Disclosure Policies: When Do They Bring Environmental Improvements?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 13(1), pages 47-64, February.
    8. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    9. repec:kap:iaecre:v:13:y:2007:i:1:p:47-64 is not listed on IDEAS
    10. Cho, In-Koo & Sobel, Joel, 1990. "Strategic stability and uniqueness in signaling games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 381-413, April.
    11. Lisette Ibanez & Gilles Grolleau, 2008. "Can Ecolabeling Schemes Preserve the Environment?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(2), pages 233-249, June.
    12. Philippe Mahenc, 2007. "Are green products over-priced?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 38(4), pages 461-473, December.
    13. Teisl, Mario F. & Roe, Brian & Hicks, Robert L., 2002. "Can Eco-Labels Tune a Market? Evidence from Dolphin-Safe Labeling," Journal of Environmental Economics and Management, Elsevier, vol. 43(3), pages 339-359, May.
    14. Janssen, Maarten C.W. & Roy, Santanu, 2010. "Signaling quality through prices in an oligopoly," Games and Economic Behavior, Elsevier, vol. 68(1), pages 192-207, January.
    15. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    16. Petrakis Emmanuel & Sartzetakis Eftichios Sophocles & Xepapadeas Anastasios, 2005. "Environmental Information Provision as a Public Policy Instrument," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-33, November.
    17. Ramon Casadesus‐Masanell & Michael Crooke & Forest Reinhardt & Vishal Vasishth, 2009. "Households' Willingness to Pay for “Green” Goods: Evidence from Patagonia's Introduction of Organic Cotton Sportswear," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(1), pages 203-233, March.
    18. Antelo, Manel & Loureiro, Maria L., 2009. "Asymmetric information, signaling and environmental taxes in oligopoly," Ecological Economics, Elsevier, vol. 68(5), pages 1430-1440, March.
    19. Bansal, Sangeeta & Gangopadhyay, Shubhashis, 2003. "Tax/subsidy policies in the presence of environmentally aware consumers," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 333-355, March.
    20. Roger A. Sedjo & Stephen K. Swallow, 2002. "Voluntary Eco-Labeling and the Price Premium," Land Economics, University of Wisconsin Press, vol. 78(2), pages 272-284.
    21. Galarraga, Ibon & Markandya, Anil, 2004. "Economic techniques to estimate the demand for sustainable products: a case study for fair trade and organic coffee in the United Kingdom," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 4(07), pages 1-26.
    22. Mahenc, Philippe, 2008. "Signaling the environmental performance of polluting products to green consumers," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 59-68, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sengupta, Aditi, 2012. "Investment in cleaner technology and signaling distortions in a market with green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 468-480.
    2. Sengupta, Aditi, 2015. "Competitive investment in clean technology and uninformed green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 125-141.
    3. Aditi Sengupta, 2016. "Green Premium, Ecolabel, and Environmental Damage," Auburn Economics Working Paper Series auwp2016-16, Department of Economics, Auburn University.
    4. Mads Greaker, 2006. "Eco-labels, Trade and Protectionism," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(1), pages 1-37, January.
    5. Philippe Mahenc, 2017. "Honest versus Misleading Certification," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(2), pages 454-483, June.
    6. Li, Yuanhao & van 't Veld, Klaas, 2015. "Green, greener, greenest: Eco-label gradation and competition," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 164-176.
    7. Ki, Hyoshin & Kim, Jeong-Yoo, 2022. "Sell green and buy green: A signaling theory of green products," Resource and Energy Economics, Elsevier, vol. 67(C).
    8. Anthony Heyes & Sandeep Kapur & Peter W. Kennedy & Steve Martin & John W. Maxwell, 2020. "But What Does It Mean? Competition between Products Carrying Alternative Green Labels When Consumers Are Active Acquirers of Information," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(2), pages 243-277.
    9. Li, Yi, 2020. "Competing eco-labels and product market competition," Resource and Energy Economics, Elsevier, vol. 60(C).
    10. Alexandre Volle, 2017. "Why is price useless to signal environmental quality ?," Working Papers 2017.30, FAERE - French Association of Environmental and Resource Economists.
    11. Maarten C.W. Janssen & Mariya Teteryatnikova, 2016. "Horizontal Product Differentiation: Disclosure and Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 64(4), pages 589-620, December.
    12. Jeong-Yoo Kim, 2017. "Pricing an Experience Composite Good as Coordinated Signals," Manchester School, University of Manchester, vol. 85(2), pages 163-182, March.
    13. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," CEE-M Working Papers hal-03098440, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
    14. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," Working Papers hal-03098440, HAL.
    15. Janssen, Maarten, 2017. "Regulating False Discloure," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168159, Verein für Socialpolitik / German Economic Association.
    16. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
    17. Mirman, Leonard J. & Salgueiro, Egas M. & Santugini, Marc, 2014. "Noisy signaling in monopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 504-511.
    18. Stefan Ambec & Paul Lanoie, 2007. "When and Why Does It Pay To Be Green?," CIRANO Working Papers 2007s-20, CIRANO.
    19. Sabyasachi Das, 2016. "Certification Under Oligopolistic Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(1), pages 251-271, September.
    20. Adriani, Fabrizio & Deidda, Luca G., 2011. "Competition and the signaling role of prices," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 412-425, July.

    More about this item

    Keywords

    Environmental consciousness; Environmental regulation; Incomplete information; Investment; Signaling.;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:smu:ecowpa:1001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ömer Özak (email available below). General contact details of provider: http://www.smu.edu/economics .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.