Hedonic and environmental quality: A hybrid model of product differentiation

• We analyze duopoly competition when products are differentiated along two dimensions.
• The first is the hedonic quality that refers to the pure performance of the good.
• The second is the environmental quality and it has a positional content.
• We consider the case in which these quality dimensions are in conflict with each other.
• We characterize the equilibrium configurations and discuss the policy implications.

In this paper, we analyze how strategic competition between a green firm and a brown competitor develops when their products are differentiated along two dimensions: hedonic quality and environmental quality. The former dimension refers to the pure (intrinsic) performance of the good, whereas the latter dimension has a positional content: buying green goods satisfies the consumer's desire to be portrayed as a socially worthy citizen. We consider the case in which these quality dimensions are in conflict with each other so that the higher the hedonic quality of a good, the lower the corresponding environmental quality. We characterize the equilibrium configurations and discuss the policy implications deriving from our analysis.