The Strategic Significance of Negative Externalities

Matthew Nagler

Managerial and Decision Economics, 2014, vol. 35, issue 4, 247-257

Abstract: Negative externalities have competitive relevance in a market when they have selective impacts – as, for example, when a product in use imposes greater costs on consumers of rival products than on other people. Because managers have discretion over aspects of product design that affect external costs, the externality in such cases may be viewed as a strategic variable. This paper presents evidence of the existence of competitively relevant negative externalities. I introduce a metric for the externality's competitive effect, the external cost elasticity of demand, which I estimate econometrically using data from the motor vehicle industry. Managerial implications are considered. Copyright © 2013 John Wiley & Sons, Ltd.

Date: 2014
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