Voluntary environmental initiatives, pollution prevention and product quality: The role of strategic competition, consumer information and regulation

The main objective of this study is to investigate the choice of environmental quality of products by intrinsically asymmetric rival firms given environmentally aware consumers who may lack perfect information about a product's environmental quality. This study develops game-theoretic models that capture the oligopolistic nature of firm competition when firms are vertically and horizontally differentiated as they compete for consumers who may not always fully internalize the externality of the product they purchase. It empirically investigates a firm's motivations for undertaking different types of pollution prevention (P2) activities and the role that voluntary adoption of Total Quality Environmental Management (TQEM), intrinsic innovativeness, and external regulatory and market pressure play in stimulating P2 levels using a sample of 233 S&P 500 firms.; The theoretical models show that the intrinsically high quality firm will produce a greener good than its intrinsically low quality rival. Even if consumers fully internalize the externality, welfare-maximizing levels of quality cannot be achieved privately. A policy that consists of differentiated quality subsidy, a differentiated cost-sharing subsidy or a uniform cost-sharing subsidy and a uniform quality tax can achieve the welfare-maximizing level of environmental quality. If consumers cannot perfectly observe the firm's environmental quality, a firm's decision to voluntarily adopt environmental initiatives will improve its reputation relative to its rival and will provide additional incentives to produce higher environmental quality goods. Policies that encourage adoption of voluntary environmental initiatives are neither necessary nor sufficient to yield welfare-maximizing environmental quality levels, while direct quality subsidies are sufficient to achieve welfare-maximizing levels of environmental quality.; The empirical analysis shows that TQEM adoption and innovativeness differ in the extent to which they promote different types of P2. Additionally, TQEM adoption and innovativeness operate as substitutes in promoting raw material, process and product modification types of P2. Strong location-based regulatory threat and public pressure also result in more P2 activities. Smaller firms and those which have lower on-site releases and lower off-site releases also adopt more P2 activities.