Strategic Quality Competition and the Porter Hypothesis

Francisco André, Paula González and Nicolás Porteiro

No 07.03, Working Papers from Universidad Pablo de Olavide, Department of Economics

Abstract: In this paper we provide a theoretical foundation for the Porter hypothesis in a context of quality competition. We use a duopoly model of vertical product differentiation where firms simultaneously choose the environmental quality of the good they produce (which can be either high or low) and, afterwards, engage in price competition. In this simple setting, we show that a Nash equilibrium of the game with low quality could be Pareto dominated by another strategy profile in which both firms produce the high environmental quality good. We then show how, in this case, the introduction of a penalty to any firm that produces the low environmental quality can result in an increase in both firms' profits. The impact of the policy on consumers depends on the effect of a quality shift on the cost structure of firms.

Keywords: environmental quality; vertical differentiation; prisoner's dilemma; environmental regulation; Porter hypothesis. (search for similar items in EconPapers)
JEL-codes: L13 L51 Q55 Q58 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-02
New Economics Papers: this item is included in nep-com, nep-cse, nep-env, nep-mic and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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http://www.upo.es/serv/bib/wps/econ0703.pdf First version, 2007 (application/pdf)

Related works:
Journal Article: Strategic quality competition and the Porter Hypothesis (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pab:wpaper:07.03

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