Quality competition and environmental damage: is there a role for relative preferences?

We consider from a theoretical and empirical viewpoint how network preferences of consumers, which differ in their willingness to pay (WTP) for green goods, affect the equilibrium configuration of a vertically differentiated duopoly when a cleaner firm competes against a dirtier rival. We find that a trade-off can emerge between emissions abatement and the catching-up process of the dirtier firm can emerge. In particular, emissions decrease only when consumers with low WTP have network preferences. Still, in this case, only the cleaner firm has an incentive to improve its environmental quality along the quality ladder, while the laggard firm is tied to its backward profile. These theoretical predictions are empirically tested by exploiting the duality of Italy’s economy, with high-income citizens mainly concentrated in Northern regions, while low-income citizens are largely located in the South. We adopt a fixed-effects spatial error model at the provincial level to relate variables on firms’ environmental management system with citizens’ environmental behaviour, proxied by the recycling rate. Overall, the empirical estimates are in line with the theoretical predictions. From the empirical analysis, it emerges that consumers’ environmental behaviour positively affects enterprises’ future environmental choices. Moreover, firms have a stronger incentive to raise their environmental quality when low-income consumers, namely those buying dirtier variants, internalise the network effect.