Recycled label design and green competition

Abstract

Facing markets with growing green awareness, an increasing number of firms are us­ing recycled materials in their products. The most effective way to convey such green efforts may be getting labeled by a third-party certifier, i.e., NGO or government agency. Across industries, we observe two types of recycled labels: The continuous label precisely displays the percentage of recycled materials in a product; the binary label sets a minimum-percentage standard and is issued to a product if the standard is met. In this paper, we build a game-theoretic model to investigate how a certifier should design the recycled label to boost an industry’s environmental performance. The industry is captured by a duopoly where firms determine product composi­tion through recycled-technology investment and thereby compete for market share. We consider three key metrics characterizing the industry: competition intensity, average recycled-investment efficiency, and symmetricity of recycled-investment ef­ficiency. We figure out a sandwich principle for label selection: For any of the three metrics, the certifier should design the recycled label as continuous if the metric is intermediate, and as binary if the metric is low or high. This principle is ratio­nalized by contrasting between the continuous label’s transparency effect—firms are spontaneously motivated by being able to entirely transfer their recycled investment into market competitiveness—and the binary label’s enforcement effect—the certi­fier can control firms to deviate from their self-motivated investment. We further demonstrate that the cerifier’s label preference cannot align with both firms, but can align with the industry as a whole. Comparative statics reveal that environmental performance and industry profitability change nontrivially in the three metrics. In particular, intenser (milder) competition or more efficient recycled investment does not necessarily improve environmental performance (industry profitability).