Eco-Labelling under Imperfect Certification: An Economic Analysis

Environmental quality is often a credence good and consumers are unable to distinguish between green and brown products. The paper aims to investigate the role of certification in providing information about product quality and reducing market inefficiencies when the certification process is imperfect. We consider a duopoly in a vertically differentiated product model where firms compete in quantities . We find that in the absence of labelling, the brown firm drives out the green firm if the cost of producing green product is sufficiently high. If both firms produce positive quantities in the market, the green firm covers a higher market share and obtains larger revenue. We then characterise pooling and separating equilibrium under imperfect certification contingent on certification fee.