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Optimal eco-labeling strategy with imperfectly informed consumers

Tijun Fan (School of Business, East China University of Science and Technology, Shanghai, China)
Yang Song (School of Business, East China University of Science and Technology, Shanghai, China)
Huan Cao (School of Business, East China University of Science and Technology, Shanghai, China)
Haiyang Xia (School of Business, East China University of Science and Technology, Shanghai, China)

Industrial Management & Data Systems

ISSN: 0263-5577

Article publication date: 26 June 2019

Issue publication date: 7 August 2019

Abstract

Purpose

The purpose of this paper is to find the optimal environmental quality criteria for a strategic eco-labeling authority with three objectives (i.e. maximizing the aggregate environmental quality, maximizing the industry profit and maximizing the social welfare). Particularly, the authors investigate how the existence of imperfectly informed consumers affects labeling criteria determination and competition among firms.

Design/methodology/approach

A game-theoretic modeling approach was adopted in this paper. A three-stage sequential game was modeled and backward induction was used to solve for a subgame perfect Nash equilibrium. To investigate the impacts of the existence of imperfectly informed consumers, the equilibrium, if all consumers are perfectly informed of the eco-label, was studied as a benchmark.

Findings

A more strict eco-labeling criterion improves revenues for both the labeled and unlabeled firms. It is interesting to find that the eco-labeling criteria to maximize industry profits are stricter than the criteria to maximize social welfare. Moreover, when the fraction of imperfectly informed consumers increases, the eco-labeling criteria to maximize aggregate environmental quality or industry profits will be more strict, while the criteria to maximize the social welfare will be looser.

Originality/value

The authors analyze the equilibrium strategies for firms against the eco-labeling criteria certified by authority with different objectives. The obtained optimal labeling strategies could provide insightful guidelines for the certifying authority to select the best suitable labeling criteria to achieve its goals.

Keywords

Acknowledgements

The authors wish to acknowledge the helpful comments provided by anonymous referees. This work was supported by the National Natural Science Foundation of China (Nos 71431004, 71202052, 71573087, 71473085 and 71302043).

Citation

Fan, T., Song, Y., Cao, H. and Xia, H. (2019), "Optimal eco-labeling strategy with imperfectly informed consumers", Industrial Management & Data Systems, Vol. 119 No. 6, pp. 1166-1188. https://doi.org/10.1108/IMDS-06-2018-0256

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited