Economic and environmental impacts of ecolabeling under different product cost structures

Abstract

The environmental quality of a product is often a credence attribute for consumers, remaining unobservable even after purchase and use. To enhance consumer trust, firms can adopt ecolabels initiated by third-party organizations. This paper investigates the impact of ecolabeling on firms, consumers, and the environment in a differentiated market under different product cost structures. Two product types are analyzed based on the costs of quality improvement: marginal cost-intensive products (MIPs) and development-intensive products (DIPs). We find that for MIPs, both firms consistently choose the same certification strategy, whereas for DIPs, asymmetric strategies may occur in equilibrium under certain labeling standards. When both firms adopt certification (i.e., full adoption), ecolabeling can (weakly) reduce firm profits and consumer surplus. However, when only one firm adopts the label (i.e., partial adoption), it generally benefits the certified firm and consumers. Although the introduction of ecolabeling helps to improve the environment, a higher labeling standard does not necessarily translate to better environmental outcomes. Actually, in a highly competitive market with strong consumer environmental awareness, inducing partial adoption with a high standard is more effective than achieving full adoption with a low standard. Additionally, we extend our model to incorporate more general settings, such as cost asymmetry, price competition, consumer heterogeneity, and partial consumer trust in uncertified products, to enhance our managerial insights.