SIGNALLING GREEN TECHNOLOGY THROUGH PRICE AND ECO-LABEL

Sladana Pavlinovic
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Sladana Pavlinovic: Faculty of Economics, Croatia

Annals - Economy Series, 2013, vol. 6, 87-94

Abstract: We apply signalling games to investigate the effect of environmental friendly technology on the adoption of eco-labels. The framework is information asymmetric because the consumers do not observe a firm type directly, but may infer it indirectly through the market price and eco-label. Also, we assume that eco-labels are unreliable since they imperfectly reveal the actual firm technology. A monopoly signalling game is studied, where a firm is a sender, and a consumer is a receiver of two signals, price and eco-label. Since the purpose of eco-labels is to distinguish environmentally friendly producer type, we elaborate the factors which affect the existence of the separating equilibria. We find necessary condition for the existence of the separating equilibrium in which both types extract the whole consumer surplus. Furthermore, if the labelling costs exceed the quality difference between the green and the brown type, then the separating equilibrium does not exist. While the pooling equilibrium without eco-labelling exists for any set of parameters, we identify the parameters’ values under which the pooling equilibrium with eco-labelling does not exist. Keywords: signalling game, green firm, eco-labelling

Date: 2013
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