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Green Product Differentiation and Innovation in the Transition to a Clean Economy

by Marion Dumas

Does the environmental concern of consumers stimulate firms to innovate and offer more sustainable products? Once introduced on the market, do green products remain niche expensive goods bought by a handful of consumers, or do they become mainstream?

Mainstreaming occurs through a process called “the product cycle”, the process by which a product’s price declines and comes within reach of less well-off households. Research on clean innovation has focused on energy technologies and the effect of policies that seek to stimulate them. Hence, we do not know very much about the role of consumers in stimulating green innovation (e.g. for food, clothing, furniture, electronics) and whether we observe “green consumer product cycles”, i.e. a mainstreaming of green consumer goods. This project starts investigating this question so that we can better leverage consumers’ environmental awareness for the transition to a clean economy.

In the paper, I propose a framework to study green consumer product innovation, weaving together research from macroeconomics, innovation studies, marketing and sociology. This framework identifies both positive feedbacks that could push green product cycles along and negative feedbacks that could hamper them.

Suppose a firm perfects a very low-impact textile and introduces it on the market with a special environmental label. How could this technology become mainstream? One important feedback is that the more we produce something, the cheaper it gets, because companies learn how to do it more efficiently and can benefit from economies of scale. Hence, as a technique becomes more prevalent it tends to get cheaper. The other positive feedback is sociological: as a product becomes more common, new consumers are more likely to adopt it because of imitation, peer effects, or simply because it is more readily available. But there are also mechanisms pulling the other way. Different consumer groups may be segregated, either culturally or spatially, which slows down imitation. In some cases, they may perceive a particular type of product as being consumed by those of another group and not their own, thus rejecting it.

Differences in income may play a particularly important role. Increasing the environmental quality of a product is one way of boosting a product’s quality. But products of higher quality generally target richer consumers who are willing to pay a higher price. The greater the differences in willingness to pay between consumers, the more firms may be tempted to continue targeting those with a high willingness to pay, by introducing the green credentials only in the most premium end of the product range. It is perhaps for this reason that appliances with the highest level of energy efficiency continue to fetch the highest price several years after their introduction on the market. This mechanism could seriously hamper the access to green products by low income households.

Therefore, we need to measure how accessible these innovations are to consumers with different incomes.

Not all of these mechanisms will be at play for every green product. We need to study them empirically. In this project, I took a deep dive into the product cycle of organic food in the US. The data comes from a panel of households, who scan all their purchases over a period of several years, allowing us to observe the prices and characteristics of the goods they buy, as well as where they live, their income, education etc. I find that organic products are penetrating steadily across all income groups. Firms are expanding the diversity of organic products and the outlets which offer them. However, these products remain very expensive. Most organic products are in the highest price category. This means that a growing number of consumers are willing to pay a high price for organic food. I also find large variation across markets. A low-income household in a rich and large market has more access to and buys more organic food than the same household in a poorer or smaller market. It also seems that greater inequality boosts the product cycle for richer households and dampens it for poorer households. Overall, we see that demand for green is increasing, which stimulates green product innovation; but heterogeneity between consumers may create incentives for firms to segment the market, limiting the spontaneous mainstreaming of green products in the absence of regulatory environmental standards.

In conclusion, I will make three broader points. First, consumer-driven green innovation only occurs if consumers are concerned about environmental problems and wish to align their consumption with this concern. We know little about how widespread this desire is and whether it is growing stronger. Second, consumers need better information about the environmental impact of products, otherwise consumer-driven green innovation is likely to result in greenwashing: companies will focus on solutions that consumers perceive to be green but may not be in reality. Finally, we must remember that to innovate, firms need a public stock of knowledge, which they can draw upon.

We need to find out more about the amount of public R&D finance directed at innovations that can significantly lower the environmental impact of consumer products (e.g. in fashion, in food systems, in electronics etc…), and support this type of R&D.

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1 Comment

David Chester
David Chester
Apr 12, 2021

This subject is Microeconomics and not Macroeconomics!

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