Innovation, Green Labels, and Consumer Preferences

Maria Dolores Garrido-Garcia

Innovations are emerging as a response to consumer increasing demands for products that satisfy new lifestyles, such as green or convenience consumption. Since consumers cannot observe whether a product contains an innovation, firms commonly rely on labels to communicate the presence or absence of these innovations to consumers. However, two challenges arise: (1) firms may use false labels (i.e., greenwashing); and (2) consumers are heterogeneous in their preferences for innovations. This dissertation consists of three papers seeking to provide a better understanding on the above problems by combining both theoretical and applied methods. Chapter One and Chapter Two adopt a game-theoretic approach to examine the factors facilitating information transmission in two settings: (i) unilateral uncertainty (Chapter One), in which a firm observes consumers’ (positive or negative) perceptions towards an innovation but the consumer cannot observe the firm's type; and (ii) bilateral uncertainty (Chapter Two), in which a firm does not observe consumers’ perceptions. Results in Chapter One show that asymmetry in labeling costs between innovative and non-innovative firms, and high penalties from greenwashing, promote information transmission; and suggest that regulation requiring mandatory certification can promote greenwashing. Chapter Two examines a situation in which the firm decides whether to use a green label (acknowledging an environment-friendly innovation) without observing consumers’ environmental concerns. Results show how this additional layer of uncertainty makes information transmission critically dependent on the proportion of green consumers (with higher valuation for environment-friendly products); suggesting that improving the firm’s information about the consumer’s type (i.e., moving from bilateral uncertainty to unilateral uncertainty) may promote greenwashing. Chapter Three employs choice experiments to investigate heterogeneity in preferences for a refrigerated ready-to-eat meal with an extended shelf-life and the preservation technology (i.e., microwave-assisted pasteurization) providing such longevity. On average, an extra day of shelf-life decreases the utility associated with the meal. A segmentation analysis reveals the presence of convenience consumers, who are willing to pay a premium for a more convenient meal (i.e., with an extended shelf-life), but the interaction effect of shelf-life with technology reverts their willingness to pay, suggesting a negative reaction to the new technology.

Innovation, Green Labels, and Consumer Preferences

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