The Effects of Ecolabels and Environmental Regulation on Green Product Development

Karthik Murali (), Michael K. Lim () and Nicholas C. Petruzzi ()
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Karthik Murali: Department of Information Systems, Statistics and Management Science, University of Alabama, Tuscaloosa, Alabama 35487
Michael K. Lim: SNU Business School, Seoul National University, Seoul 08826, Republic of Korea
Nicholas C. Petruzzi: Department of Supply Chain and Information Systems, Pennsylvania State University, University Park, Pennsylvania 16802

Manufacturing & Service Operations Management, 2019, vol. 21, issue 3, 519-535

Abstract: Problem definition : We develop a framework for studying the impact of voluntary ecolabels and mandatory environmental regulation on green product development among competing firms. Academic/practical relevance : We contribute to the academic literature on environmental quality competition by explicitly accounting for the credibility of environmental claims made by firms, and by exploring the implications for society of two mechanisms used to remedy credibility-related consumer discounting of firms’ self-declared environmental qualities. We draw parallels between our findings and instances of environmental labeling and regulation from industry to highlight the practical implications of our study. Methodology : We use a game-theoretic framework to analyze a consumer-driven model of green product development. Results : Credibility asymmetry drives product differentiation between two competing firms. The less credible firm always adopts external certification, while the more credible firm does so only if its credibility is sufficiently low. Credibility may also determine whether or not the government should intervene. In the absence of an external certifier, the regulator should intervene by imposing a mandatory environmental standard that is decreasing in stringency as the credibility of the more credible firm increases. In the presence of a certifier, the regulator should intervene if neither firm is sufficiently credible, or if consumers do not value environmental stewardship highly. Managerial implications : We identify how and when government should (and should not) intervene to stimulate green product development when competing firms can use self-labels or external certifications to communicate their environmental performance to consumers. We also determine the optimal strategies for the competing firms and external certifiers.

Keywords: ecolabels; environmental quality competition; environmental regulation (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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