The bright side of having a strong rival under environmental certification

Abstract

Third-party certification plays an important role in promoting Environmental Corporate Social Responsibility (ECSR) activities, which usually cannot be directly observed by consumers. This article studies firms’ costly abatement efforts as their ECSR, in a horizontally differentiated duopoly with asymmetric costs. We consider a Non-Governmental Organization (NGO) as the external certifier to set an ECSR standard. We show that the equilibrium certification outcome depends on the cost asymmetry between the two firms as well as the relevant market dynamics (e.g., the degree of product substitutability, consumers’ valuation for ECSR efforts). Specifically, when the cost gap between the two firms is sufficiently wide, the NGO would set a high standard to selectively target the more efficient firm. In this setting, we find that surprisingly, the more efficient firm can be better off when the abatement cost of its less efficient rival is reduced, provided that the competition is not too intense. We also examine mandatory certification operated by the government and show that a firm may prefer to have a strong rival staying in the market rather than a weak rival exiting the market. Our analysis provides a rationale for the (free) sharing of environmental technology patents among competing firms in the industry.