Consumer confusion over the profusion of eco-labels: Lessons from a double differentiation model

Abstract

How are eco-label strategies affected by consumer confusion arising from the profusion of eco-labels? This article provides a theoretical insight into this issue using a double differentiation framework. We assume that consumers perceive a label as a sign of quality compared to an unlabeled product, but that they cannot fully assess the environmental quality associated with each label and only see each label as a particular variety of a similar product. We analyze the pricing strategies of three firms, each one providing one product: a labeled product, with high or medium environmental quality, according to the eco-label, or an unlabeled product. We infer lessons for eco-labeling policies, according to the identity of the certifying organization: the regulator, an NGO or the firms. We show that the firm supplying the eco-labeled product with a high environmental quality is weakened by consumer confusion while the firm selling the unlabeled product suffers from strict labeling standards, to the benefit of the firm providing the labeled product with a lower environmental quality, which gains a competitive advantage. Most labeling policies consist of harmonizing labeling criteria, but only certification by a third party, the regulator or a NGO, guarantees the high environmental quality of labeled products, whereas certification by firms leads to a uniform undemanding standard. However, when both labels are provided by two different certifiers, including a firm, harmonization of environmental standards does not occur and the NGO's or regulator's eco-labeling standard will be much more stringent than the firm's one, preventing NGO's or public eco-labeling policy to significantly enhance quality of the environment and welfare.