A Theory of Multi-Tier Ecolabel Competition

Abstract

We model competing ecolabels sponsored by an industry trade association and an environmental group. For either sponsor in autarky, multi-tier labels are more attractive when there are many producers with high cost of quality, and the cost gap between low-cost and high-cost firms is large. When the two sponsors compete using binary ecolabels, multiple equilibria exist, and either sponsor may offer the more ambitious label; competition may increase environmental protection. When sponsors compete using multi-tier labels, however, there exists a unique equilibrium and competition produces less environmental protection than would the NGO in autarky.