Volume 7, Issue 2 - Quality Promotion through Eco-Labeling

This special issue is a collection of papers that address three questions of critical importance to the design of eco-labeling marketing strategies and policies. These three questions deal respectively with the efficiency of eco-labels when considering market structure and trade, the credibility of eco-labels, and consumer attitudes towards eco-labels.

An intriguing alternative to traditional methods for regulating externalities is the provision of information about firms' environmental attributes. An increasingly important example of this approach is "eco-labeling," where a third party certifies firms' products. This sort of approach can also be used in similar circumstances, for example providing consumers with information on the techniques used to produce the good in question (e.g., shade-grown coffee) or the nature of rent-sharing arrangements that govern the transaction (e.g., fair trade coffee). I present a model of this phenomenon. An important aspect of this scheme is that the product in question is typically a credence good (buyers cannot infer product quality from search or consumption), and hence must rely on a third-party for information about the product. But the very fact that consumers cannot infer quality from consumption implies they cannot infer accuracy about the signal; indeed, the certifying agency may not be able to perfectly determine quality at a reasonable cost. As such, the certification process is potentially noisy, albeit with green firms more likely to pass than brown firms. While it is likely to increase the fraction of green units in the market, the introduction of eco-labeling can either increase or decrease welfare. In addition, expected profits earned by green sellers are likely to be more variable in an equilibrium with certification. The paper provides some casual empirical evidence from Latin American coffee markets as a backdrop to the theoretical results.

This paper focus's on the third-party certifiers' strategy when choosing a required label quality, and the consequent market outcome. We consider two different objectives of the certifier: maximizing global demand for the labeled product (wide public policy), or maximizing global quality of the market (global quality policy). In a duopoly set up with firms bearing different costs with respect to quality provision, firms always opt for differentiation strategies: only one adopts the label. However, the labeling firm is not necessarily the most efficient one. In the case of a wide public policy, the efficient firm will produce labeled products only if costs of labeling are sufficiently low. In the case of a global quality policy, the low cost firm will always push the high-cost firm into the labeling program.

Using a model of vertical product differentiation, we analyze the welfare gains from economic integration when countries harmonize their eco-labeling and certification policies for environmental credence goods. Specifically, we show that harmonized mandatory, exclusive discrete labeling will not maximize the gains from economic integration, i.e., the choice of eco-labeling regime can have a negative effect on market structure if firms choose to exit, reducing the range and quality of goods in the integrated market, and thereby reducing aggregate environmental benefits. In contrast, under a harmonized mandatory, non-exclusive discrete labeling regime, private certification increases the likelihood of maximizing the gains from international economic integration.

We develop a vertical differentiation model for the setting of standards and labeling in an international economy with two countries, North (N) and South (S) under two regimes: Autarky and International Trade. We assume that a firm in country S has a comparative advantage in producing low quality goods while a firm in country N has comparative advantage in producing high quality goods. Under Autarky each country sets a specific standard and the domestic firm behaves as a monopolist. Under International Trade both countries agree on harmonized standards and firms compete in the unified market. We show that standards harmonization is welfare enhancing compared to the Autarky scenario and that the introduction of a national label in country N does not lead to a Pareto improvement in country S. Consumers in both countries will be worse off with the introduction of the label, for low levels of firm S's comparative advantage.

The role of labeling is to solve the adverse selection problem caused by unsubstantiated claims from firms. The problem however is likely to remain unsolved if the labeling agency is not trustworthy. The agency can be suspected to divert the fees charged for labeling from their primary purpose of collecting information in order to raise excessive revenue. This paper addresses this issue and shows that labeling may be wasteful if the agency is likely to be untrustworthy. To award firms green labels, the agency may charge fees that exceed the Ramsey level at which the revenue needed for collecting information is raised with a minimal loss in terms of efficiency.

This article develops a vertical differentiation model to study the competition and environmental effects of multiplicity of eco-labels within a given market. The focus is on the informational content of multiple eco-labels and whether or not they reflect the environmental qualities the labels purport to represent. Two settings are considered. In the first setting, which represents the benchmark, we assume information is complete (consumers know the true environmental qualities of the eco-labeled goods). In the second setting, information is incomplete but consumers use price as a signal for environmental qualities. Our results show that when information is complete, introduction of a second eco-label in a market improves the environmental qualities of eco-labeled goods. When information is incomplete, introduction of a second label leads to a rise in prices and a reduction in the environmental qualities of the goods. The latter setting requires specific regulation whereby information must be revealed by a benevolent social planner.

Formally, eco-labels are modeled as tools that enable the mitigation of informational asymmetry on product environmental quality. We argue that even in the presence of an eco-label, markets for eco-friendly products may still be inefficient. We model eco-friendly goods as goods with environmental quality information costs. We induce buyers' preferences in laboratory posted offer markets with information costs on products' quality. We analyze the effect of varying information costs on market efficiency and consumer information demand. We also test for the effect of self-declared labels. We find that a low information cost introduces a friction not high enough to lead to adverse selection whereas a high information cost drives out high quality products. We find self-declared labels have a positive effect on market efficiency but only sellers benefit from self-declared labels. We find that demand for information follows the classic law of demand and that it is a non linear function of product price as theoretically expected. We also find that, when information costs are high, demand for information decreases when sellers use self-declared labels: either buyers use self-declared labels as an information-revelation device or reputational affects feedbacks are a substitute for information demand. We draw implications for the design of eco-labels.

Information programs to promote cellulosic biofuels may not achieve their objectives unless consumers can be induced to care about the information presented to them. The social psychology literature highlights two commonly used models to link psychological variables to environmentally related behaviors: the Theory of Planned Behavior (TPB) and the Norm Activation Theory (NAT). Other studies have compared the strength of these models or have adapted these models by adding additional variables, but few have compared across the alternative variable combinations noted in the literature. That is, most studies have added one or two psychological variables to the NAT or TPB models and have found that the additional variable is a significant factor influencing behavior. However, we are unfamiliar with any study that has included the full suite of examined variables within one model. This could be a problem in that the psychological variables are likely to be correlated. In turn, the output of these models may suffer from omitted variable bias; which could lead to erroneous conclusions about the importance of any specific variable. Previous findings that individual variables are significant in influencing behaviors may be incorrect. One objective here then is to start examining whether these 'significant findings' are robust, and if not, whether we can be more parsimonious in future modeling efforts. Economists often assume preferences are adequately proxied by the person's socioeconomic characteristics or by the person's participation in some environmental behavior. Recently, economists have begun to recognize that these characteristics are poor proxies especially since the proxies commonly used are binary (0/1) variables that provide relatively little detail, are usually not policy or program relevant and lack a theoretical justification. Thus, another objective is to compare the performance of models that incorporate these proxy variables with models incorporating psychological variables. Our results suggest: that a combined TPB and NAT model may be more effective than either model alone; that many variables seen as important in the literature may be less important than previously thought (allowing for more parsimonious models - resulting in less costly data collection); and that common proxy variables like membership in an environmental group may not work that well.

Individuals exhibit systematic cognitive biases which make their behavior 'deviant' when compared to the benchmark of perfectly rational individuals. The person's tendency to make errors in judgment based on cognitive factors, are thought to be based upon heuristics and lead to decisions that are sub-optimal. Ignoring cognitive biases can affect diverse dimensions of eco-labeling policies and lead to flawed prescriptions. We review several cognitive biases that affect eco-labeling related behaviors and show how taking them into account allows a better understanding of eco-labeling schemes and informs policy makers in order to design and implement more effective eco-labeling policies.

An experiment was conducted in Germany to evaluate the impact of environmental, societal and health information about nanotechnology on consumers' willingness to pay for two types of orange juice produced by means of nanotechnologies. Participants had to choose successive messages revealing information about potential but uncertain impacts. Results show that health information is of priority for participants and it significantly decreases WTP for both juices, while societal and environmental information does not significantly influence WTP. Based on a welfare simulation, we determine the economic value of nano-product introduction and additional information about health consequences of nanotechnology applications. Information about health impacts is necessary for guaranteeing a welfare improvement. However, as many participants are reluctant regarding these food innovations, the profit variations suggest that the emergence of these new products is unlikely.

This research addresses two important issues for the future expansion of organic consumption in France. The first one is related to knowing whether the organic choice is a permanent feature of consumer's attitude or not: Do organic buyers occasionally pick one organic product or do they choose organic for "several" categories? The second issue concerns the impact of prices on buying organics which is revisited, distinguishing between capturing new consumers and increasing the demand coming from people already involved in organic markets. These questions are examined using the market basket approach; the price issue requires further estimations of demand models. The study relies on two staple food products, eggs and milk. The findings are: (i) choosing organic for one of the two items reinforces the probability of purchasing also the organic version of the second item; (ii) marginal reductions of the organic price have no impact on the decision of buying organic rather than conventional products; (iii) when people already purchase organic products, they may be price sensitive; and (iv) organic buyers' demographic profile is not related to income neither to age nor to family size, but to the educational level.