The market for "harmful component-free" products under pressure from the NGOs







Palm oil Product differentiation Biofuels NGO Eco-label Environmental quality D - Microeconomics/D.D1 - Household Behavior and Family Economics/D.D1.D11 - Consumer Economics: Theory D - Microeconomics/D.D6 - Welfare Economics/D.D6.D62 - Externalities D - Microeconomics/D.D8 - Information, Knowledge, and Uncertainty/D.D8.D83 - Search • Learning • Information and Knowledge • Communication • Belief • Unawareness L - Industrial Organization/L.L1 - Market Structure, Firm Strategy, and Market Performance/L.L1.L15 - Information and Product Quality • Standardization and Compatibility Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q58 - Government Policy

Abstract 0

Non-governmental organizations (NGOs) are exerting growing pressure on firms to eliminate product components (such as palm oil) that are harmful to the environment (such as rainforests) or replace such components with NGO-certified sustainable components. Under which conditions does NGO pressure lead firms to eliminate basic components from their products or, alternatively, substitute damaging components with certified sustainable components? What are the ensuing effects on market structure, environmental quality, and social welfare? The paper addresses these issues using a model of two-dimensional vertical product differentiation. It shows that, for an NGO that collects certification fees to accrue its budget and finance its awareness campaign, it may — paradoxically — be optimal to reduce the certified product’s market share and eventually evict it.

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