Optimal Eco‐Label Standards in an Oligopolistic Setting

The last couple of decades have seen the emergence of several labels, many of which certify a higher environmental quality to appeal to customers with environmentally friendly tastes. Existing eco‐labels present different standards and different levels of uptake. Often, there is a trade off between these two dimensions: the eco‐label sponsor anticipates that if a standard is too stringent, fewer producers are likely to adopt it. This article looks at the standard that is optimally chosen to solve this trade off, depending on whether the eco‐label sponsor is a non‐governmental organization that aims at reducing emissions, an industry association that wants to maximize total profits, or a government that cares about consumer surplus. In order to compute the eco‐label adoption rate in an oligopoly, we extend the classical model of vertical differentiation to a scenario with more than two producers. When optimally choosing their standard, the non‐governmental organization chooses the most ambitious one, the government chooses the least ambitious one, and the industry association chooses a standard in between.