UiS Business School Seminar: Product ratings and externalities

Abstract

We investigate how information regarding production externalities (e.g. ecolabels) can be presented to create market pressure on firms to reduce them. Specifically and novelly, we ask whether integrating information regarding externalities and consumer product ratings into one rating, can result in firms feeling pressure to reduce external- ities from all consumers, not just ‘green/activist’ consumers. Theoretically we show that a reputation equilibrium exists where producers invest in both high product qual- ity and low negative product externalty. However, we show that with separate ratings, this equilibrium requires a high share of ’green’ consumers who only wish to purchase products with low production externalities, whereas with combined ratings it does not. Experimentally we confirm the prediction that while both separate and combined rat- ings help overcome the asymmetric information problem, investments in externality reduction were substantially higher in the combined rating treatment.