Monopoly Pricing and Eco-labeling Signaling
Keywords:
eco-label, quality signaling, monopoly, credence goodsAbstract
Environmental friendly products are one kind of credence goods which is impossible to observe its ‘ethical quality’. It is difficult for consumers to distinguish between ethical and conventional firms. Then an eco-label from a third-party certifier is suspected to be an effective ethical quality signal that develops consumer trusts. This study, a monopoly signaling game, aims to find the firm equilibrium prices. It also objects to obtain the necessary conditions that make the eco-certification effective, under the conditions that conventional goods may be labeled and eco-friendly goods sometimes fail to be labeled. The results show that although prices fail to signal ethical quality in this case, an eco-label can be an indication of ethical characteristic. Namely, separating equilibrium which only an eco-friendly firm asks for label exists when an application cost is sufficiently high and the accuracy of labeling is large enough.In contrast, when the application fee is low, both types of firm may want to compete for a label.
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