Abstract
We analyse the effect of a “green network externality” in a context of consumers’ environmental sensitiveness and competition between firms in both environmental quality and product prices. In particular, we investigate firms ‘aptitude to implicitly collude on prices in a vertically differentiate market. We find that green network effects hamper collusion. We also find that firms collude if they recognize an adequate value in future joint profits.
Highlights
Eco-friendly products represent an increasingly share of household expenditure
We find that green network effects hamper collusion
European Commission (2005) and OECD (2002) studies highlight that if they were sold at the same price as their more polluting counterparts, most of consumers would turn towards green products experiencing a grater pleasure of consuming them as the number of consumers doing the same
Summary
Eco-friendly products represent an increasingly share of household expenditure. According to the recent surveys by the European Commission (2008, 2009), 83% of Europeans citizens care about the impact of products on the environment when buying; 75% are “ready to buy environmentally friendly products even if they cost a little bit more”, compared to 31% in 2005. The uniqueness of our model principally derives from the assumption of a network effect in a green market on price and quality strategy of firms. A scenario in which firms can collude in markets for vertically differentiated products has been studied by Chang (1991) He sets up a model à la Hotelling where production costs are expected to be zero and firms play trigger strategies as in Friedman (1971). European Commission (2008, 2005) and the OECD (2002) studies highlight that if they were sold at the same price as their more polluting counterparts, a large majority of consumers would turn immediately towards green products, given their environmental sensitiveness. We seek to derive the one stage Nash equilibrium in a vertically differentiated duopoly and the firms' best deviation strategies from the collusive compliance taking into account green network effects
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