Relative quality-related (dis)utility in a vertically differentiated oligopoly with an environmental externality

Nada Ben Elhadj and Ornella Tarola

Environment and Development Economics, 2015, vol. 20, issue 3, 354-379

Abstract: In a vertically differentiated setting, we consider a two-stage game between a clean firm and a dirty producer with quality competition at the first stage and price competition at the second stage under the assumption that consumers have relative preferences for quality. The equilibrium configuration changes depending on the consumers' dispersion and the relative preferences: either both producers are active at equilibrium, or the green producer is the only firm active in the market, the brown competitor being out. We analyze how the equilibrium changes when preferences are country specific (developed vs. developing countries). Finally, we show that whatever the market configuration at equilibrium, there can be a pollution damage reduction compared to the standard case without relative preferences. To the best of our knowledge, we are the first to introduce in the literature of green consumerism the notion of (possibly country-specific) relative preferences.

Date: 2015
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