Multiplicity of Eco-Labels, Competition, and the Environment

This article develops a vertical differentiation model to study the competition and environmental effects of multiplicity of eco-labels within a given market. The focus is on the informational content of multiple eco-labels and whether or not they reflect the environmental qualities the labels purport to represent. Two settings are considered. In the first setting, which represents the benchmark, we assume information is complete (consumers know the true environmental qualities of the eco-labeled goods). In the second setting, information is incomplete but consumers use price as a signal for environmental qualities. Our results show that when information is complete, introduction of a second eco-label in a market improves the environmental qualities of eco-labeled goods. When information is incomplete, introduction of a second label leads to a rise in prices and a reduction in the environmental qualities of the goods. The latter setting requires specific regulation whereby information must be revealed by a benevolent social planner.