Optimal eco-labeling strategy with imperfectly informed consumers
| DOI | https://doi.org/10.1108/IMDS-06-2018-0256 |
| Pages | 1166-1188 |
| Date | 08 July 2019 |
| Published date | 08 July 2019 |
| Author | Tijun Fan,Yang Song,Huan Cao,Haiyang Xia |
| Subject Matter | Information & knowledge management |
Optimal eco-labeling strategy with
imperfectly informed consumers
Tijun Fan, Yang Song, Huan Cao and Haiyang Xia
School of Business,
East China University of Science and Technology, Shanghai, China
Abstract
Purpose –The purpose of this paper is to find the optimal environmental quality criteria for a strategic eco-
labeling authority with three objectives (i.e. maximizing the aggregate environmental quality, maximizing the
industry profit and maximizing the social welfare). Particularly, the authors investigate how the existence of
imperfectly informed consumers affects labeling criteria determination and competition among firms.
Design/methodology/approach –A game-theoretic modeling approach was adopted in this paper.
A three-stage sequential game was modeled and backward induction was used to solve for a subgame perfect
Nash equilibrium. To investigate the impacts of the existence of imperfectly informed consumers, the
equilibrium, if all consumers are perfectly informed of the eco-label, was studied as a benchmark.
Findings –A more strict eco-labeling criterion improves revenues for both the labeled and unlabeled firms.
It is interesting to find that the eco-labeling criteria to maximize industry profits are stricter than the criteria
to maximize social welfare. Moreover, when the fraction of imperfectly informed consumers increases, the
eco-labeling criteria to maximize aggregate environmental quality or industry profits will be more strict, while
the criteria to maximize the social welfare will be looser.
Originality/value –The authors analyze the equilibrium strategies for firms against the eco-labeling criteria
certified by authority with different objectives. The obtained optimal labeling strategies could provide
insightful guidelines for the certifying authority to select the best suitable labeling criteria to achieve its goals.
Keywords Competition, Eco-labelling criterion, Imperfectly informed consumers
Paper type Research paper
1. Introduction
As consumers’awareness and concerns in the environment grow, an increasing number of
consumers would opt for greener products, which often evoke positive feelings during
purchase (Mantovani and Vergari, 2013; Hamilton and Zilberman, 2006). A survey
conducted in Europe found 80 percent of citizens purchase environmentally-friendly
products, 26 percent often and 54 percent sometimes[1]. In addition, technological
advances makes it possible and even easier for consumers to observe or even trace the
environmental quality in products. For example, information of crops can be recorded
during process of agriculture production and then stored to radio-frequency identification
tags (Wang et al., 2010).
However, consumers usually lack the expertise to fully perceive the environmental
quality of products. As a result, eco-labels certified by a third-party authority have become
an effective tool to disclose the environmental quality of products. It seeks to inform
consumers about the environmental impacts during the production, consumption and waste
phases of the products consumed (Gallastegui, 2010). Eco-labeling allows consumers to
differentiate between products which otherwise appear similar, generating an economic
gain[2]. According to the report of 2017 IBIS, increasing consumers focusing on
environmental sustainability will underpin industry growth. From 2012 to 2017, there was a
3.8 percent annual growth relating to eco-labeling products[3]. Eco-label is regarded as a
Industrial Management & Data
Systems
Vol. 119 No. 6, 2019
pp. 1166-1188
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-06-2018-0256
Received 16 June 2018
Revised 31 August 2018
31 October 2018
Accepted 7 November 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
The authors wish to acknowledge the helpful comments provided by anonymous referees. This work
was supported by the National Natural Science Foundation of China (Nos 71431004, 71202052,
71573087, 71473085 and 71302043).
1166
IMDS
119,6
quality signal by consumers, which, to some extent, eliminates the information asymmetry
between consumers and firms.
Eco-labeling encourages firms to invest more to manufacture greener products, however,
too strict or too loose eco-labeling criteria would be useless for neither the market nor the
environment (Bernstein and Cashore, 2007). Therefore, different certifying authorities have
made effort in establishing appropriate eco-labeling criteria. According to an online
database (ecolabelindex.com), more than 450 eco-labels worldwide that are sponsored and
administered by government, environmental non-government organizations (NGOs), or
business associations, of which 148 include st andards for food/beverages. When
determining the eco-labeling criteria, it is often the case that not all consumers are
familiar with eco-labeling. The European consumer organization reported that only
36 percent of Europeans are able to correctly identify the EU eco-label logo[4]. Consumer
confusion would reduce or eliminate the value of eco-labeling for firms (Harbaugh et al.,
2011; Horne, 2009; Grunert, 2011).
Motivated by the fact that consumers are often not fully aware of the environmental
quality represented by eco-labels, it is of interest to government bodies and labeling
authorities to investigate the impacts of the existence of imperfectly informed consumers on
the determination of labeling criteria and the competition among firms. The paper will
investigate what the best labeling strategies are in three scenarios based on the strategic
goals of the certifying authority, namely, maximizing aggregate environmental quality,
industry profits and the social welfare. It will be demonstrated in this paper that these three
goals yield vastly different optimal eco-labeling strategy for firms competition.
The reminder of this paper is organized as follows. Section 2 covers literature reviews.
Section 3 is devoted to the formulation of the model. In Section 4, we analyze the subgame
perfect Nash equilibrium and labeling criteria setting when all consumers own the perfect
knowledge of the eco-label. In Section 5, we study the subgame perfect Nash equilibrium
and labeling criteria setting if partial consumers are not fully informed of the eco-label.
The main conclusions and discussions will be summarized in the Section 6. All proofs are
given in the Appendix.
2. Literature review
Some of the earlier related works focus on the impacts eco-labeling has on consumers as well
as firms (Arora and Gangopadhyay, 1995; Bougherara et al., 2005; Dranove and Jin, 2010;
Ortega et al., 2012; Ben Youssef and Lahmandi-Ayed, 2008; Bottega and Freitas, 2009;
Bottega et al., 2009; Bonroy and Constantatos, 2015). Nilsson et al. (2004) investigated 58
single message labeling schemes to figure out if they meet the expectations of the
consumers. They concluded that the majority of consumers believed the schemes fall short
of providing credible quality assurance. Amacher et al. (2004) investigated in a duopoly
market and found firms’incentives to invest in green (eco-friendly) technologies depended
on their relative cost structure. Mason (2006) studied a market under asymmetric
information where technologies are fixed and output are not and analyzed the influence on
the social welfare when eco-labeling option is introduced. Myslivecek (2008) discussed the
labeling decisions in a perfect competitive market and concluded that profit maximizing
certification is never welfare optimal. Caswell and Anders (2011) presented a survey of the
evidence to show the performance impacts of mandatary or voluntary labeling schemes.
Mason (2011) showed that when certification can distinguish a green firm from a normal
firm only with a certain amount of noise, eco-labeling can either raise or lower welfare
depending upon the cost and accuracy of the certification process.
Part of the literature emphasizes how certifying authority strategically set up the eco-
labeling schemes and determine the quality criteria. Ben Youssef and Lahmandi-Ayed
(2008) calculated endogenously the labeling criteria in his model extension, due to the
1167
Optimal eco-
labeling
strategy
To continue reading
Request your trial