Component-free Strategy of Firms under Pressure from the NGOs
Abstract
There is a growing pressure of NGOs on firms to have them eliminate a component (as oilpalm) harmful for the environment (as rainforests) from their products or to replace such a
component with a sustainable substitute component the NGO certifies. Under which
conditions NGO’s pressure leads a firm to eliminate basic component in its product or,
alternatively, to substitute a damaging component with the certified sustainable component?
What are the ensuing effects on market structure?
This paper addresses these issues using a model of two-dimensional vertical product
differentiation. We assume that consumers have heterogeneous preferences for the
environmental quality but homogeneous preferences for the organoleptic quality. Using this
original framework, we show how consumers’ relative willingness-to-pay for environmental
quality and for organoleptic quality play a crucial role in efficiency of NGO campaign. The
cost structures of elimination of the harmful component and of its replacement by a
substitutable component also condition the effectiveness of the NGO campaign.
Moreover we extend our analysis of the strategies used by the NGO to fulfill its objective
by considering the possibility for the NGO to directly influence the consumers environmental
awareness through an information campaign on top of their disclosure campaign about the
harmfulness of the component, and also to certify another component, less harmful for the
environment.
We show that the NGO may waive the objective of achieving a market where only the least
environmentally harmful product is offered, when the cost of developing such a product is
very high, and may prefer to restrict the market share of this product by favouring the entry of
a new competitor with a product using the certified component.