Price Competition and Product Differentiation when Consumers Care for the Environment


Conrad, Klaus


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URL: https://ub-madoc.bib.uni-mannheim.de/1002
URN: urn:nbn:de:bsz:180-madoc-10021
Document Type: Working paper
Year of publication: 2002
The title of a journal, publication series: Discussion Papers / Institut für Volkswirtschaftslehre und Statistik ; Department of Economics, Universität Mannheim
Volume: 609
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Institut für Volkswirtschaftslehre und Statistik > Discussion Papers
Subject: 330 Economics
Classification: JEL: H23 L11 Q38 ,
Subject headings (SWD): Qualität , Preis , Wettbewerb
Abstract: Increasing environmental awareness may affect the pleasure of consuming a good for which an environmental friendly substitute is available. When deciding to buy differentiated products, a compromise is sometimes made between preferred characteristics of the good and its environmental properties. In this paper we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spacial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game where at the first stage each firm chooses the characteristic of its product. At the second stage each firm chooses its price. The unique equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way we determined the choice of environmental characteristics by a welfare maximizing authority. The result of this analysis is that characteristics differ under private decision making and social one. It can be shown, however, that it is possible to choose environmental policy instruments in order to stimulate private firms to produce the social optimal qualities.
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Conrad, Klaus (2002) Price Competition and Product Differentiation when Consumers Care for the Environment. Open Access Discussion Papers / Institut für Volkswirtschaftslehre und Statistik ; Department of Economics, Universität Mannheim Mannheim 609 [Working paper]
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