Competing eco-labels and product market competition

I examine the impact of competition between eco-labeling programs in a market where eco-labels that communicate information about product's environmental quality (a credence attribute) are also strategic variables for competing firms. Specifically, I consider a dynamic setting where an industry-sponsored eco-labeling program and a program sponsored by environmental NGOs compete strategically in setting the labeling standards, before price-setting firms make strategic choices of which eco-label (if any) to adopt; adopting firms not presently meeting the labeling standards undertake costly quality improvement to comply with them. I find that the competition between eco-labeling programs may lead to the same high environmental benefit as when there exists only the NGO program. I also find that the competition may yield higher social welfare.     

The World of Regulatory Influence

Models of firms’ influence over the regulatory agencies that oversee them have traditionally been constrained by several factors, including a lack of direct measures of “influence,” an inability to account for variations in the institutional environment within which firms operate, and a nearly singular focus on industry-level measures of interest group strengths. In this paper, we employ a global database and novel measures to provide a fresh look at the determinants of firms’ influence over regulatory agencies. We find that in addition to traditional industry-level determinants, important country-level institutional and firm-level determinants affect firms’ regulatory agency influence. We also find that regulatory process variations affect firms’ influence over regulators. With these empirical estimates in hand, we generate a Regulatory Influence Index that ranks influence levels of typical firms that operate in each sample country in the dataset, and then discuss the substantial country-level variation in regulatory agency influence that obtains.     

On the use of labels in credence goods markets

We analyze credence goods markets in the case of two firms. Consumers know that the quality of the good varies but do not know which firm is of high quality. First, we show that the high quality producer may be unable to monopolize the market, or even to survive in some cases, in situations where it is efficient and trusted by all consumers. Second, although a label restoring full information improves welfare, it may also reduce both firms’ profits by intensifying competition. Since even the high quality producer may not wish to label its product, in such cases the label must be mandatory. Third, an imperfect label which moves everybody’s beliefs closer to the truth without restoring full information may produce adverse results on market structure and welfare, either by increasing or by reducing the variance of beliefs.      

Competition and innovation: an experimental investigation

The paper analyzes the effects of more intense competition on firms’ investments in process innovations. More intense competition corresponds to an increase in the number of firms or a switch from Cournot to Bertrand competition. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. An increase in the number of firms from two to four reduces investments, whereas a switch from Cournot to Bertrand increases investments, even though theory predicts a negative effect in the four-player case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented. However, the positive effect of moving from Cournot to Bertrand competition is more pronounced in the former case.     

Recycling and extending product-life: an evolutionary modelling

This paper presents a model-based analysis of firms’ economic incentives to extend product life and market recyclable products. We address this problem by developing an evolutionary simulation model to describe the behavior of business firms as interacting with consumers and recyclers. Market structure, business firms’ R&D strategies and consumers’ preferences are found to have an important influence here. The simulation results show that improvement in recycling is necessary but not sufficient to solve the issue of increase in waste. Recycling will need to be backed up with an extension in product-life to face such an unwanted increase. Adopting such a strategy could be positive for firms and for the environment because it could lead to high economic performance, both in terms of profits and market share, and to high environmental performance, both in terms of product recyclability and product lifetime. Our results suggest introducing regulation policies aimed at encouraging firms to invest in developing green products, i.e. those which are easily recyclable and which have a long lifetime, and getting consumers to buy them. It would also seem crucial to lend support to innovation outlay for such firms and to favor their seeking to improve product performance.

Demand fluctuations and capacity utilization under duopoly

Summary.  This paper studies the impact of uncertain demand on firms’ capacity decisions when they operate in an oligopolistic environment. We define a two-stage game where firms choose capacity in the first stage without knowing which state of Nature is going to realize, and output levels in the second, knowing which state is realized. We prove the existence of a symmetric subgame perfect equilibrium at which firms are in excess capacity compared with the capacity they would choose in the Cournot certainty equivalent game. Received: May 17, 1996; revised version July 31, 1996     

Demand competition and investment heterogeneity in industries based on systemic technologies: evidence from the US long-distance telecommunications services industry, 1984–1996

Industries based on systemic technologies are often characterized by a dynamically evolving market structure. The market structure that provides the context for firms’ investment choices itself evolves due to the feedback effect of firms’ investments. In such cases, analyses of investment-performance relationship, purporting to explain sustainable competitive advantages, should ideally account for the endogeneity of the determinants of market structure—technology, demand, and policy—and firms’ investment choices. This paper focuses on the endogeneity of the demand-side determinants of market structure and firms’ demand-side investments under the assumed conditions of constant technology and policy environment. In doing so it contradicts the extant depiction of the evolution of industrial market structure in the above context as primarily caused by the evolution of underlying technological system in response to firms’ endogenous technological investments that generate sustainable competitive advantage for the dominant firms. A dynamic evolutionary model of demand competition captures the competition in the downstream market for basic industry product and its complements in an industry based on systemic technology during its post-interoperability stage. A natural experiment drawn from the US Long-distance telecommunications services industry during 1984–1996 allows testing the hypotheses drawn from the above model in a panel data setting.     

Capital endowment, credit constraint and FDI: Analysis based on heterogeneous firms

To examine the impact of capital endowment and credit constraint on firms’ FDI decisions, we build a model of investment portfolio based on heterogeneous firms setup. We find that financial factors matter for firms’ internationalization. More capital endowment or less credit constraint lowers cutoff productivity for firms to do FDI.     

Creative Disasters? Flooding Effects on Capital,Labour and Productivity Within European Firms

This paper examines the impact of floods on the firms’ capital accumulation, employment growth and productivity by using a difference-in-difference (DID) approach and considering the firms’ asset structure. We find evidence that, in the short run, companies in regions hit by a flood show on average higher growth of total assets and employment than firms in regions unaffected by flooding. The positive effect prevails for companies with larger shares of intangible assets. Regarding the firms’ productivity a negative flood effect is observable which declines with an increasing share of intangible assets.      

Abuse of EU Emissions Trading for Tacit Collusion

In this paper, we show that loopholes in EU emissions trading law foster tacit collusion that impacts oligopolistic product markets. The abuses originate from the covert misuse of EU emissions trading institutions, such as pooling or project-based mechanisms. We analyse two types of these loopholes by means of game theoretical methods to show how oligopolistic firms establish output restrictions, even if those firms are price takers on the~permit market (which might actually be the case for the majority of obligated firms in the EU). The identified misuse of emissions trading law increases firms’ profits, decreases the consumers’ surplus and has negative effects on social welfare for specified parameter ranges. Consequently, public authorities should not allow emissions trading’s overall good reputation—based upon its efficient abatement of pollution—to blind them to options in European emissions trading legislation that would eventually restrict competition.      

Technology adoption decisions under a mixed regulatory system of tradable permits and air pollution fees for the control of Total Suspended Particulates in Taiwan

By using a newly proposed tradable permit system built under the current air pollution fee regulation for the control of Total Suspended Particulates in Taiwan as an example, a mixed-integer non-linear programming model that minimizes the total regulatory costs of firms is applied to investigate how different permit trading ratios and the design of banking might affect firms’ technology adoption decisions and permit trading behavior. By incorporating binary variables in the model to represent firms’ decisions as to whether or not to install new control equipment, the results show that when the unit air pollution fee rate is higher than the firms’ abatement costs, the design of banking causes many firms to install new control equipment that results in an over-reduction of emissions. If no air pollution fee is imposed, the trading ratio plays a more important role than the reservation rate for banking in determining the firms’ emission reduction strategies under a pure permit trading scheme. While the conclusion from this study that uses a non-uniformly mixed pollutant as an example may hold only when certain conditions are met, the framework can be applied to other uniformly mixed pollutants through parameter changes without any limitation. In addition, the modeling technique presented here offers policy-makers a very convenient approach to empirical analysis.      

Adoption of Pollution Prevention Techniques: The Role of Management Systems and Regulatory Pressures

This paper investigates the extent to which firm level technological change that reduces unregulated emissions is driven by regulatory pressures, and firms’ technological and organizational capabilities. Using a treatment effects model with panel data for a sample of S&P 500 firms over the period 1994–1996, we find that organizational change in the form of Total Quality Environmental Management leads firms to adopt pollution prevention practices, after controlling for the effects of various regulatory pressures and firm-specific characteristics. We find that the threat of anticipated regulations and the presence of ‘complementary assets’ is important for creating the incentives and an internal capacity to undertake incremental adoption of pollution prevention techniques.     

Effluent taxes,market structure,and the rate and direction of endogenous technological change

This paper studies the effects of effluent taxes on firms’ allocation of resources to cost-reducing and emission-reducing R&D, and on entrepreneurs’ decisions to develop new goods and enter the market. A tax set at an exogenous rate that does not depend on the state of technology reduces growth, the level of consumption of each good, and raises the number of firms. The induced increase in the variety of goods is a benefit not considered in previous analyses. In terms of environmental benefits, the tax induces a positive rate of pollution abatement that offsets the “dirty” side of economic growth. A tax set at an endogenous rate that holds constant the tax burden per unit of output, in contrast, has ambiguous effects on growth, the scale of activity of each firm and the number of firms. Besides being novel, the potential positive growth effect of this type of effluent tax is precisely what makes this instrument effective for welfare-maximizing purposes. The socially optimal policy, in fact, requires the tax burden per unit of output to equal the marginal rate of substitution between the growth rate of consumption and abatement. Moreover, a tax/subsidy on entry is needed, depending on whether the contribution of product variety to pollution dominates consumers’ love of variety.      

Quality distortions in vertical relations

This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that from the firms’ perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms’ outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.     

An Integrated Model of the Adoption and Extent of E-Commerce in Firms

This work aims to explain firms’ decisions to adopt Internet-based e-commerce, and the extent to which the adopters subsequently implement e-commerce to commercialize their products and services. We examine various types of factors previously considered by the literature (competitive environment, organizational characteristics, strategic orientation, innovative capacity, managers’ characteristics, IT equipment possessed and the use made of it). The analytical model developed here on the basis of a sample of 2,038 firms suggests that the factors influencing the adoption decision are different from those that eventually influence the results of firms’ commercial operations on the Internet. Likewise, we discuss the contribution of each type of determinant and the implications.      

Minimum quality standards and consumers’ information

The literature so far has analyzed the effects of minimum quality standards (MQS) in oligopoly, using models of pure vertical differentiation, with only two firms, and perfect information. We consider products that are differentiated horizontally and vertically, with imperfect consumers’ information, and more than two firms. We show that a MQS changes the consumers’ perception of produced qualities. This increases the firms’ returns from quality enhancing investments, notwithstanding contrary strategic effects. Our analysis justifies the use of MQS in industries where consumers cannot precisely ascertain the quality of goods, for instance pharmaceuticals or products with chemical components involved. Paper presented at the 2004 ASSET conference in Barcelona, and at the 2005 EARIE conference in Porto. The authors wish to thank an anonymous referee for helpful suggestions.     

Creation of jobs and firm-sponsored training in a matching model of unemployment

We offer a search and matching model with firms that create job vacancies and are willing to sponsor general skills training. The spillover of skilled labor between firms has the dual effect of increasing job vacancies and enhancing firms’ incentives for free riding. The former effect is combined with a reduction in search costs to cause a positive feedback between the supply of skilled labor and the creation of job vacancies, suggesting that firms encourage each other. On the other hand, with the latter effect, search costs are reduced, inducing firms to take a free ride on each other’s investments, thereby decreasing the supply of skilled labor and the creation of job vacancies. A reduction in search costs can lead to different results depending on which of the two mechanisms is actualized. Additionally, our analysis allows for “labor poachers,” or firms absorbing skilled labor in the market, to consider direct competition between training firms and poaching firms.      

A Note on Emissions Taxes and Incomplete Information

In contrast with what we perceive is the conventional wisdom about setting a second-best emissions tax to control a uniformly mixed pollutant under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if marginal damage is increasing and there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.     

Backward integration and collusion in a duopoly model with asymmetric costs

This paper formalizes the idea that input transactions might be used to implement side payments among colluding firms. A model is proposed to analyze the effect of backward integration on collusive outcomes in a downstream duopoly with asymmetric marginal costs. Vertical integration expands the set of collusive outcomes that are sustainable for a given realization of the discount factor. This is an additional effect of vertical integration that antitrust authorities should consider. Side payments implemented by input sales are more relevant the larger the difference in marginal costs, since they allow for the shifting of production towards the relatively more efficient firms, while maintaining firms’ incentives to collude. A price of the input above that posted by an alternative source or sales of the input below cost may be observed, depending on the realization of downstream firms’ costs.      

Firms’ Compliance to Environmental Regulation: Is There Really a Paradox?

It has often been claimed that firms’ compliance to environmental regulations is higher than predicted by standard theory, a result labeled the “Harrington paradox” in the literature. Enforcement data from Norway presented here appears, at first glance, to confirm this “stylized fact”: firms are inspected less than once a year, detected violators are seldom fined, but still, serious violations seem relatively rare. However, at a closer look, the pattern seems less paradoxical: enforcement of minor violations is lax, but such violations do flourish; serious violations, on the other hand, are subject to credible threats of harsh punishment, and such violations are more uncommon. This seems quite consistent with predictions from standard theory. We argue that the empirical existence of the Harrington paradox is not well documented in the international literature. The claim that firms’ compliance with environmental regulations is generally higher than predicted by standard theory should thus be regarded as a hypothesis rather than an established fact.