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Oligopolies with (Somewhat) Environmentally Conscious Consumers: Market Equilibrium and Regulatory Intervention

Authors


  • We thank Amy Ando, Marcus Asplund, Greg Leblang, Dan Bernhardt, Jay Pil Choi, Carl Davidson, Gregory Kordas, Chistopher Laincz, Ming Li, Damba Lkhagvasuren, Vibhas Madan, Adam Rennhoff, Lambros Pechlivanos, Konstantinos Serfes, John Wilson, Alex Winter-Nelson and seminar participants at the American Economic Association Annual Meetings, Concordia University, Drexel University, the Heartland Environmental and Resource Economics Conference (Iowa State University), the International Industrial Organization Conference, the Midwest Economic Theory Conference, Michigan State University, the Program for Environmental and Resource Economics of the University of Illinois, Conference for Research in Economic Theory and Econometrics (CRETE), the Society for the Advancement of Economic Theory (SAET) bi-annual conference, and the University of Guelph for helpful comments and discussion. Financial support from the Environmental Protection Agency STAR program grant no. R830870 is gratefully acknowledged. Feedback from an Associate Editor and two anonymous referees has substantially improved this paper.

Abstract

We consider a horizontally differentiated duopoly where consumers care about the product's “greenness.” Firms can be asymmetric: they may differ in the product's intrinsic value and may also differ in their chosen level of greenness. We examine the choice of greenness and the implications of various policy interventions. We show that (i) the choices of product greenness are strategic substitutes, (ii) the high-intrinsic quality firm produces the greener product, (iii) the low-quality firm's greenness may increase with the cost of its provision or decrease with consumer willingness to pay for it, (iv) a minimum quality standard (MQS) leads the greener firm to lower its environmental quality and can even reduce average quality, (v) greenness is underprovided even if consumers fully internalize the externality, and (v) an MQS can reduce welfare if the greenness of the high-quality firm exceeds the MQS, even when environmental quality is underprovided. The effects of policy interventions on profits differ qualitatively across polices and firms: A firm that lobbies for one type of intervention may lobby against another similar one, and a firm may lobby for an intervention while its competitor may lobby against it. A subsidy for the development costs of a green product can financially hurt both firms.

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