Labels Battle: Competition between NGOs as Certifiers

Transcription

1 Labels Battle: Competition between NGOs as Certifiers Sylvaine Poret Preliminary version Abstrat This paper studies the ompetition between the NGOs ating as standard-setting organizations We onsider a double duopoly model where NGOs ompete to offer firms labels for sustainability quality and where firms ompete to sell onsumers differentiated produts We assume that NGOs objetives an be very different, some NGOs being mission-driven organizations, others market-driven organizations We find that two stringent sustainability quality labels annot oexist if the onsumers sustainability awareness is low and/or the osts related to quality and ertifiation are high Moreover, the two NGOs have to offer two very different labels in terms of sustainability quality riteria in order to be present on the labels market Keywords: labels, NGOs, vertial produt differentiation, sustainability quality JEL lassifiation: L13, L15, L31, Q01 INRA, UR1303 ALISS, Ivry-sur-Seine Frane; Department of Eonomis, Eole Polytehnique, Palaiseau, Frane Postal address: INRA-ALISS 65 boulevard de Brandebourg 9405 Ivry-sur-Seine edex Frane Phone number: +33(0) Fax number: +33(0) address: sylvaineporet@ivryinrafr 1

2 1 Introdution An existing diretory of ertifiations, the Eolabel Index, urrently traks 458 eolabels in 197 ountries and 5 industry setors, inluding AB (Agriulture Biologique) Frane s national logo for organi produts, Fairtrade International an assoiation of 5 organizations around the world, Marine Stewardship Counil(MSC) with a standard for sustainable fishing, or Non-GMO Projet an organization offering independent verifiation of testing and GMO ontrols for produts in the US and Canada 1 Some labels are ertified by a third-party, suh as a publi institute or a Non- Governmental Organization (NGO), but others arise from self-delarations by firms Aording to the 010 Global Eolabel Monitor, most eo-labels (58%) were run by non-profit organizations, 18%, by for-profit organizations, and 8%, by governments, with other types (industry assoiations, hybrid for/non-profit partnerships, publi-private partnerships) omposing the rest (Big Room In and World Resoures Institute, 010) Moreover, about 9% of labeling programs required ertifiation before they award an eo-label, whereas others require registration but no previous ertifiation Of those requiring ertifiation, the majority (64%) were third-party ertifiation systems On the orporate side, more than one-third of multinational ompanies have voluntary third-party ertifiations for environmental or soial standards (Kitzmueller and Shimshak, 01) In this way, NGOs as standard setters or ertifying agenies appear as the preferred partners of firms in many fields, inluding sustainable agriulture, fishing, pakaging, supply hain management, labor issues, renewable energy, forest resoures, health, and safety Aording to Gereffi et al (001), NGOs are the strongest and most legitimate ertifiers, beause they are able to oordinate bodies whih set and oversee ompliane The inreasing presene of NGOs and the onfidene they arouse afford them the power to positively influene private setor behavior through onstrutive partnerships Some NGOs motivations for suh ollaborations with the private setor are identifiable The primary motivation is the sinews of war: money Indeed, the inreasing sarity of publi funds and the inreasing number of NGOs fore NGOs to find new soures of funding Beause firms are institutions with relatively easier aess to finanial resoures, NGOs are motivated to establish allianes with orporations Another motivation for NGO ollaboration with orporations is the rise of soietal 1 Eolabel Index was initiated in 009 by Big Room In, a Vanouver-based ompany, and the World Resoures Institute, a Washington DC-based environmental think tank ( aessed )

3 problems Indeed, a partnership is a way to sensitize orporate lientele to an NGO s ause A positive onsequene of suh partnerships is an inrease in notoriety: the assoiation with a firm with a strategi position in the market is one way for an NGO to strengthen its reputation and politial influene (Selsky and Parker, 005) Thus, NGOs have an inentive to work with large, onsumer-oriented, notorious ompanies Consequently, a real market for NGOs servies is reated The development of sustainability labels borne by NGOs has reated a real ompetition between them A good illustrative example of this phenomenon is the Lipton-Rainforest Alliane partnership In May 007, Unilever, the world s largest tea ompany, announed plans to soure its entire tea supply sustainably The objetives of this CSR ativity as revealed by Unilever were the following: to seure its soure of supply by a long-term partnership; to rebuild Lipton s market share and to reover the potential additional supply ost through sales growth; and to obtain the first mover gain on the tea market sine none of the other main tea brands initiate the same kind of approah Due to these objetives, an alliane with a third party ertifiation might be the best solution for Lipton in order to establish an auditing and ertifiation infrastruture in produing ountries Then, Unilever needed to find a redible ertifiation partner Three labels developed by NGOs have been studied by Unilever to make redible their approah: FLO (Fairtrade), Utz Certified, and Rainforest Alliane Unilever hose the Rainforest Alliane based on their ommon approah, whih are the Rainforest Alliane s ability to work on an international sale and with both large sale plantations and small farmers, and its market-based premium for farmers and its ability to help move an entire industry (Poret, 010) In spite of the fat that tea was not in the produt portfolio of the Rainforest Alliane, the NGO agreed to ooperate Thus, this shows its entry into ertifying tea prodution in addition to its long-established programs in offee, ooa, bananas, sustainable forestry, and tourism Historially based in Latin Ameria, by this alliane, the NGO strengthens its presene in Afria Another reason of the agreement is the ommon point of view about sustainability and mainstream strategy 3 Furthermore, the Rainforest Alliane an benefit of the notoriety and the visibility of For instane, the onept of fair trade has experiened an impressive expansion following the launh of the Max Havelaar label (Fairtrade) awarded to brand-name produts or private label produts sold in large retail stores (Poret, 010) 3 Tensie Whelan, the Rainforest Alliane Exeutive Diretor, said in 007: We are delighted to be working with a ompany that understands the value of putting sustainability at the heart of its business 3

4 the brand Lipton, espeially in Europe, where the NGO and its logo werre not well known The international NGO Rainforest Alliane aims are to onserve biodiversity and ensure sustainable livelihoods by transforming land-use praties, business praties and onsumer behavior Rainforest Alliane sustainable agriulture ertifiation, like the ertifiation sheme UTZ Certified, does not offer produers a minimum or guaranteed prie, as it is required under the Fairtrade sheme, therefore leaving them vulnerable to the market prie variations In 005, a report by Ethial Corporation Magazine ompared Fairtrade and Rainforest Alliane ertifiation programs and it onluded offee produers under the latter sheme reeived 1% less for their rop than under Fairtrade This explains why the Rainforest Alliane s sustainable agriulture ertifiation has been alled Fairtrade Lite by some ritis Therefore, Unilever would have hosen a less demanding standard This kind of situations raise several onerns inside militants and organizations Firms whih offer ertified produts pay liense fees to the NGO in order to use its label/logo, whih represent a revenue soure for it Beause of their large market share, volumes traded and sales made, large mainstream ompanies are the largest revenue-raisers This reates a dangerous dependeny between NGOs and these onventional firms In addition, some mainstream ompanies have reated ertifiation systems in assoiation with NGOs or ertifiation organisations This proliferation of different ertifiation systems and logos (Fairtrade, Bio-équitable, Rainforest Alliane) generates a risk of onfusion for onsumers and of redibility loss for firms Moreover, this abundane reates a ompetition between labels In this ase, the risk is that the bad label drives out the good one, that is, the ertifiation system with less stringent and less ostly standards beomes the leader on the market and the benhmark Most probably to respond to the ompetition with other sustainability labels, in a mainstreaming approah, FLO reently proposed the development of a Fairtrade Souring Partnership (FSP) with a new fair trade label Currently, for a produt to bear the Fairtrade logo, FLO standards require that all ingredients that an be ertified must be and that a minimum of 0% of the total produt omprise Fairtrade ertified ingredients The FSP would shift from this poliy and use a new logo to ertify produts ontaining only one ertified ingredient - sugar, ooa, or otton - even if the ingredient omposes less than 0% of the total produt This new sheme aims to inrease the volume of ommodities being purhased from Fairtrade ertified farmers and to engage ompanies that do not want to ommit to the full ost of ertifying their produts or that are 4

5 only interested in partiular ommodities However, the introdution of a new ertifiation mark ontributes to onsumer onfusion and possibly the erosion of redibility Moreover, the new mark has less stringent standards for Fairtrade produts and is heaper for ompanies to adopt There is a high risk that this mark will then devalue Fairtrade ertifiation More and more voluntary labels with similar riteria being established by NGOs, this paper proposes to analyze the ompetition between the NGOs ating as standard-setting organizations Our aim is to investigate the strategy set up by some NGOs, suh as Fairtrade, onsisting in reduing the level of its quality standards to fae up to the fat that their labels are less hosen than the others by firms Despite the importane of NGOs presene, eonomi analyses of the ompetition between NGOs are rare Competition between NGOs is mainly studied through their fundraising ativities In Aldashev and Verdier (009, 010), horizontally differentiated NGOs at as produers of goods and servies in developing ountries and ompete with eah other through fundraising Aldashev and Verdier (009) explain the phenomenon of internationalization of major development NGOs, similar in struture to the multinational firms Aldashev and Verdier (010) examine a model where the NGOs alloate their time between working on the projet and fundraising They find that with free entry of NGOs the equilibrium number of NGOs an be either larger or smaller than the soially optimal one, depending on the effiieny of the fundraising tehnology The approah of this paper is loser to the literature on the eonomis of labels, see Bonroy and Constantanos (015) for a review on this topi Ben Youssef and Abderrazak (009) and Harbaugh et al (011) model label ompetition in a ontext of unertainty about the quality of the labeled produts Ben Youssef and Abderrazak (009) study a duopoly in whih eah label an only be used by one firm; under omplete information adding the seond label always improves environmental protetion, but if onsumers annot tell whih label is more stringent, the firms use pries to signal qualities, and the seond label atually redues overall environmental protetion Harbaugh et al (011) assume firms qualities and the stringeny of labels are exogenous; they find that even small amounts of unertainty an reate onsumer onfusion that redues or eliminates the value to firms of adopting voluntary labels There is a substantial body of literature omparing label levels aording to the types of standard-setting organizations - government, NGO, the industry - and their objetives (Heyes and Maxwell, 004; Bottega and De Freitas, 009; Bottega et al, 009; Manasakis et al, 013) Fis- 5

6 her and Lyon (014, 013) examine the ompetition between an NGO and a for-profit industry assoiation Fisher and Lyon (014) find that environnemental benefits may be smaller in the presene of both labels than the NGO label alone Fisher and Lyon (013) show that when the number of firms is fixed, the industry sets an ambitious binary standard and the NGO sets a basi binary standard When there is free entry into the market, the NGO sets an ambitious binary standard and the industry delines to offer a label at all In all these papers, the objetive of NGOs is to maximize the environnemental quality or minimize a speifi harm, usually related to some externality Bottega et al (009) onsider two different objetives of third party ertifiers to settle the quality standard of the label : to maximize the high quality demand or to maximize the overall quality of the market, independently of how many onsumers will benefit from the high quality This study differs from previous works in several ways Most importantly, we model rivalry between two labels reated by two NGOs, two organizations of the same type We nevertheless suggest that the NGOs objetives an be very different Some NGOs are mission-driven organizations, whose ativity is exlusively ause oriented, with a strong ommitment to some values suh as fair trade or hild labor Their objetives are then learly oriented towards the stringeny of their standards, that is, the quality of the label Other NGOs work with large ompanies, often offer made-to-measure standards to them These NGOs may be seen as market-driven organizations, whose objetive is to stimulate trade in order to fully promote their ause We assume that NGOs seek to maximize a preferene funtion, a trade-off between the quantity and quality of labeled produts sold We then onsider a duopolisti vertial differentiation model with two sustainability labels whose the level of quality is endogenously hosen by eah NGO Our key finding is that the oexistene of both labels is possible only if the objetives of NGOs in terms of sustainability quality are extremely different This remainder of the paper proeeds as follows: Setion presents the model Setion 3 analyzes the firms hoies in terms of pries and labels Setion 4 haraterizes the equilibrium labeling sheme for the two NGOs Finally, setion 5 onludes Model We develop a Bertrand duopoly model of vertial differentiation Sustainability quality is the vertial differentiation variable We onsider this sustainability quality represents some omposite 6

7 harateristi expeted to objetively and synthetially measure the attention attahed by the firm mainly to the sustainable development This sustainability quality is promoted by two NGOs, A and B, whih an propose two different labels The following game is onsidered In the first stage, two NGOs ating as ertifiers hoose the level of standards required for obtaining their label, given their respetive objetive In the seond stage, the two firms, 1 and, hoose sequentially whih label to adopt In a third stage, the firms set simultaneously pries In the fourth stage, onsumers hoose whether or not to buy good with sustainability label A or B 1 Consumers As in Motta (1993), Youssef and Lahmandi-Ayed (008), Fisher and Lyon (013) and Barry et al (014), we adopt a framework of vertial differentiation onsistent with Mussa and Rosen (1978) Consumers have the same utility funtion u = θs p (and zero utility if they do not buy the differentiated good) They differ in their tastes for sustainability quality, desribed by the parameter θ [θ, θ], θ being uniformly distributed with unit density The higher the quality s of the good, the higher the utility u reahed by the onsumers for any given prie p However, onsumers with a higher θ will be willing to pay more for a higher sustainability quality good Considering that the onsumers awareness of sustainable development results in a higher willingness-to-pay for a sustainable produt than for a standard one, we onsider that the parameter θ represents the level of the onsumers sustainability awareness In aordane with the literature on produt differentiation, we assume that onsumers an buy at most one unit of the good When a produt is ertified by a label, onsumers know for sure that the quality level is s, in the sense that the two NGOs ating as ertifiers are trustworthy The NGO j offers the label j ertifying the sustainability quality level s j, with s A > s B The following threshold values allow to haraterize onsumers hoies: θ AB = p A p B s A s B, θ B = p B s B Consumers haraterized by θ > θ AB obtain a higher utility from onsuming the good ertified by the NGO A rather than the alternative good ertified by the NGO B; while onsumers haraterized by θ AB > θ > θ B obtain a higher utility from onsuming the quality set by the NGO B 7

8 rather than no onsumption The utility funtion implies the following demand funtions for the good labelled by NGO j, with j = A, B: q A (p A, p B, s A, s B ) = θ θ AB (1) q B (p A, p B, s A, s B ) = θ AB θ B () Notie that the market is not overed, ie some onsumers do not buy the ertified variety of the good When only one label is present on the market, the demand funtion for this labeled good is then q j (p j, s j ) = θ p j s j Firms On the supply side of the produt market, we onsider two symmetri firms, i = 1, The firms marginal ost depends on the hosen label and is defined as (s j ) = (s j + k)s j for j = A or B (3) The marginal ost funtion (s j ) has two omponents The first omponent, s j, represents the quadrati ost of providing sustainability quality for firms Marginal ost of meeting the label j requirements is independent of the quantity of good produed but stritly inreasing and onvex in the sustainability quality s j The seond omponent, ks j, is the ost of ertifying paid to the NGO j The parameter k represents the unit ost of ontrolling labelled riteria if the sustainability quality level s j is viewed as a number of preise riteria ertified by the label j, that is, the number of riteria verified and ontrolled by the NGO j To build up the model, we assume that the onsumer with the highest valuation for sustainability quality is willing to pay the unitary ost of labeled riteria, θ > k If firms hoose different labels, firm i profits are given by π ij (p A, p B, s A, s B ) = [p j (s j + k)s j ]q j (p A, p B, s A, s B ) for j = A or B (4) If firms hoose the same label, the lassi Bertrand game applies, whih provides zero profit for both firms In this ase, the total demand for the labeled produt is shared equally by the two firms 8

9 3 NGOs In the absene of publi intervention on a sustainability issue, we want to investigate the impat of the ompetition between labels supported by NGOs The label awarded by a NGO ertifies that the produt satisfies ertain quality riteria It provides onsumers with redible information on the sustainability quality of the labeled variant otherwise unobservable We assume that the ertifiation tehnology is the same for the two NGOs, that is, monitoring is almost perfet and the ost of monitoring is equal to zero The main hypothesis adopted onerns the objetive of the NGOs Aldashev and Verdier (009, 010) assume that NGOs maximize the impat of their respetive projets, that is, the quantity of servies they produe towards their missions Most of the literature on eo-labels (Heyes and Maxwell, 004; Bottega and de Freitas, 009; Fisher and Lyon, 013, 014; Bréard, 014) assumes that the NGO maximizes the environnemental quality In this paper, we propose that NGOs realize a trade-off between quality of their label and quantity of labeled produts sold This allows us to distinguish mission-driven NGOs and market-driven NGOs To formalize this idea, as Poret and Chambolle (007), we assume that the objetive is to maximize a utility funtion whih depends positively on the sustainability quality and on the quantity of labeled produt sold 4 It is speified in the following utilitarian form for the NGO A: U A (s A ) = s α A(q A (s A, s B )) 1 α, (5) where α is the NGO A s quality preferene parameter, with α [0, 1] When α = 05, the utility of the NGO is equal to its benefits Likewise, the NGO B s objetive is to maximize the following utility funtion U B (s B ) = s β B (q B(s A, s B )) 1 β, (6) where β is the NGO B s quality preferene parameter, with β [0, 1] 4 Poret and Chambolle (007) speifially study the Fair Trade label and propose that the utility of the Fair Trade ertifier depends positively on the Fair Trade wholesale prie, whih determines the small produers revenue, also as on the Fair Trade produt quantity sold, whih represents the number of small produers in the Fair Trade network 9

10 3 Firms hoies The game is solved by bakward indution We start by solving the third stage of the game in whih firms hoose their pries as a funtion of their preeding hoie of labels 31 Prie hoie At this point two types of market outome an be onsidered No Differentiation: when the two firms hoose the same label, the lassial Bertrand game applies The two firms offer the same prie p = (s j + k)s j with s j = A or B, depending to the label seleted This provides zero profit for the two firms and the total demand for the labeled produt is equal to q = θ k s j Differentiation: when the two firms hoose different labels, they have some market power due to produt differentiation Consider the firm i (i = 1 or ) whih has hosen the label A, it will solve the following profit maximization program: max p A π ia (p A, p B, s A, s B ) = [p A (s A + k)s A ]q A (p A, p B, s A, s B ) (7) The firm i whih has hosen the label B will solve the following profit maximization program: max p B π ib (p A, p B, s A, s B ) = [p B (s B + k)s B ]q B (p A, p B, s A, s B ) (8) First order onditions give following equilibrium pries: p A(s A, s B ) = p B(s A, s B ) = s A [(s A s B )θ + (s A + k)s A + (s B + k)s B ], (9) 4s A s B s B [(s A s B )θ + (s A + k)s A + (s B + k)s A ] (10) 4s A s B The expressions imply that the high quality firm (with label A) fixes a prie higher than the prie harged by the low quality firm (with label B) Note also that the loser s B is to s A, the loser the solution is to a Bertrand solution, that is, pries are equal to marginal osts The demand funtions at the equilibrium pries in stage 3 are then: q A(s A, s B ) = q B(s A, s B ) = s A [(θ k) (s A + s B )], (11) 4s A s B s A [(θ k) + (s A s B )] > 0 (1) 4s A s B 10

11 These funtions imply that the quantity of produts labeled by NGO A, sold by the firm i, is positive if s A + s B < θ k (13) The presene of two sustainability labels on the market is possible only if the levels of the two sustainability quality labels are relatively low ompared to the demand/ost ratio of supplying a ( ) labeled produt Thus, at the prie ompetition stage, two stringent labels an oexist if θ k the onsumers sustainability awareness is high and the osts related to quality and ertifiation are low, that is, when firms and NGOs are ost-effiient to implement and ontrol the sustainable quality Respetive profits of firm i and i are: π ia (s A, s B ) = s A (s A s B ) ( (θ k) (s A + s B ) ) (4s A s B ), (14) π ib (s A, s B ) = s As B (s A s B ) ( (θ k) + (s A s B ) ) (4s A s B ) (15) It is easy to hek that the partial derivative of π ia (s A, s B ) with respet to s B is negative sine s A > s B and the ondition (13) is satisfied In a easier way, the derivative of π ib (s A, s B ) with respet to s A is positive This means that the more differentiated the produts in terms of sustainability quality, the less intense the ompetition and the higher firms profits 3 Label hoie As Bottega et al (009), we assume the hoie of label is sequential Bottega et al (009) argue that in real world, labeling proesses have usually relatively slow-motion patterns, as only few firms adopt labels in the earlier stages of implementation This may be explained by the fat that voluntary labelling requires firms to adapt their prodution or trade methods More, we assume sequentiality in ertifiation hoie to avoid multipliity of equilibria This does not modify at all the firms hoie at equilibrium, but it allows the seletion of an equilibrium when there is more than one See Ben Youssef and Lahmandi-Ayed (008) for an idential assumption in a ontext of quality hoie We assume that firm 1 is the Stakelberg leader and firm the follower The 11

12 extensive form of the ertifiation game is depited in Figure 1, with π 1A (s A, s B ) = π A (s A, s B ) = s A (s A s B ) ( (θ k) (s A + s B ) ), (4s A s B ) (16) π 1B (s A, s B ) = π B (s A, s B ) = s As B (s A s B ) ( (θ k) + (s A s B ) ) (4s A s B ) (17) Label A (0,0) Firm Label A Firm 1 Label B (, ) Label B Label A (, ) Firm Label B (0,0) Figure 1: The ertifiation game This allows us to state the equilibrium strategies in the following proposition Proposition 1 (Firms Equilibrium Strategies) In a duopoly model with vertial differentiation, the results of the ertifiation game are the following: (i) if s A > max { θ k s B, s B }, firm 1 hooses the label B and firm also the label B - strategy (B, B); (ii) if max { s A (s B ), s B } < s A θ k s B with s A (s B ) = θ k s B hooses the label B and firm the label A - strategy (B, A); s B (4(θ k) 3s B ), firm 1 (iii) if s B < s A s A (s B ), firm 1 hooses the label A and firm the label B - strategy (A, B) Proof See the appendix A1 1

13 êê q - k ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ s A = (,) = = ( ) (,) with > (,) with > êê q - k ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ 3 (,) with > êê q - k ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ 3 Hq êê - kl ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ 3 s B Figure : The label hoie The results of the ertifiation game are represented in Figure The oexistene of two sustainability quality labels is not possible if the levels of the labels are relatively high ompared to the demand/ost ratio of supplying a labeled produt, that is, if s A > θ k s B This is due to the fat that when both labels are stringent or when the the onsumers awareness (θ) is low, the market size is low Hene, firms do not fight one other for a market nihe We defined this effet as the market overage effet Firms have an interest in avoiding diret prie ompetition by differentiating their produts with different labels only if the market is fully overed, that is, if s B is relatively low This first result means that two stringent sustainability quality labels an oexist in a duopoly market with symmetri firms only ( ) if the demand/ost ratio of supplying a labeled produt is relatively high, that is, if the onsumers sustainability awareness is high and/or the osts related to quality and ertifiation are low When the two sustainability quality labels an oexist on the market θ k ( s A < θ k s B ), firm 1 hooses the lowest quality label (label B) if s A > s A (s B ) and hooses the highest quality label (label A) if s A < s A (s B ) Firm always hooses firm 1 s opposite strategy The hoies an be explained as follows When the less stringent label, B, requires a low quality level, the market size is potentially large If the more stringent label, A, also requires a relatively low quality level, it is 13

14 profitable for firm 1 to hoose the label A in order to fully take advantage of the market overage effet (q A > q B ) If the label A requires a intermediate quality level, it is again profitable for firm 1 to hoose the label A In this ase, firm 1 takes advantage of the produt differentiation effet by setting a high prie (q A < q B ) When the less stringent label, B, requires a intermediate quality level, the market size is redued and the produt differentiation through the quality is also limited Thus, whatever the quality level of the more stringent label, the leader firm hooses the label B 4 Labels ompetition In this setion, we analyze the strategi behavior of NGOs as sustainability quality ertifiers through the hoie of the quality level required to obtain their label When only one label is present on the market, the NGO named C sets the sustainability quality level to maximize its following objetive: U C (s C ) = s γ C (q C(s C )) 1 γ with q C (s C ) = θ k s C (18) ( ) The unique solution of this program is s 0 C = γ θ k q 0 C = (1 γ)(θ k) and the total quantity sold is equal to When both labels are present on the market, we assume that the NGOs simultaneously hoose the level of their sustainability quality standard The program of the NGO A is the following: max U A (s A, s B ) = s α A s A ( ) 1 α sa ((θ k) (s A + s B )) (19) 4s A s B From the first order ondition, we obtain the best response funtion of NGO A as follows: (i) when α <, 5 s BR A (s B) = 4α(θ k) (3α )s B + Y A if s 8 B < 4α θ k 4 4α+3α s B if s B 4α θ k 4 4α+3α (ii) when α 5 s BR A (s B) = 4α(θ k) (3α )s B + Y A 8 s B if s B < (4α 1) θ k 3(1+α) if s B (4α 1) θ k 3(1+α) 14

15 with Y A = (4(θ k) 3s B )(4α (θ k) (4 4α + 3α )s B ) The best response of the NGO A is to differentiate its label from the rival label by setting a higher sustainability quality standard when it is possible, that is, when the level of the NGO B s standard, s B, is relatively low The program of the NGO B is the following: max U B (s A, s B ) = s β s B B ( ) 1 β sa ((θ k) + (s A s B )) (0) 4s A s B From the first order ondition, we obtain the best response funtion of NGO B: s A if s A < 1+β θ k 3(1 β) (i) when β < 1, 4 sbr B (s (3+β)s A) = A (1 β)(θ k) Y B if 1+β θ k s β 3(1 β) A 1 θ k 1+β θ k s A if s A > 1 θ k 1+β with Y B = ((θ k) 3s A )((1 β )(θ k) (1 + β)(3 β)s A ) ; (ii) when β 1 4, sbr B (s A) = s A The best response of the NGO B is to differentiate its label from the rival label by setting a lower sustainability quality standard when it is possible, that is, when the level of the NGO A s standard, s A, is relatively high But, this strategy is feasible only when the NGO B s quality preferene parameter, β, is weak Indeed, if the objetive of the NGO B is fully oriented towards the sustainability quality of produts it ertifies, its best strategy is to set the level of its label at its highest possible value, s A Proposition (NGOs Equilibrium Strategies) In a double duopoly model with vertial differentiation, the results of the NGOs ompetition game are the following: (i) When β 1 4, then there are multiple equilibria suh as s A = s B ; (ii) when β < 1 4 and (a) when α < 1 (1 β), there are multiple equilibria suh as s A = s B ; (b) when α 1 (1 β), there is one unique equilibrium (s A, s B ); (iii) when β < and (a) when α < α(β), there are multiple equilibria suh as s A = s B ; 15

16 1 (b) when α(β) < α, there are two equilibria (1 β) (s A, s B ) and (s A, s B ) with s A > s A and s B < s B ; () when α 1 (1 β), there is one unique equilibrium (s A, s B ); Proof See the appendix A Results of the NGOs ompetition game are represented in Figure 3 a 1 = 1 (1 ) (, ) è!!!!! 33-1 ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ 8 = () = 1 ÅÅÅÅ 3, (, ) = () 7- è!!!!!! 33 ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ 16 = = () 1 ÅÅÅÅÅ 4 1 ÅÅÅÅÅ 3 b Figure 3: The quality hoie In a double duopoly model where NGOs ompete to ertify differentiated produts through firms, the oexistene of both labels is possible only if the objetives of NGOs in terms of sustainability quality are extremely different In this ase, this allows firms to hoose eah a different label, that is, the differentiation strategy too 5 Conlusion We have developed a simple model of ompetition between two NGOs whih may have different objetives in terms of sustainability We found first that two stringent sustainability quality labels 16

17 annot oexist in a duopoly market with symmetri firms if the onsumers sustainability awareness is low and/or the osts related to quality and ertifiation are high Firms realize a trade-off between a market overage effet and the lassial produt differentiation effet Seond, we show that the two NGOs, whih ompete to offer firms a sustainability quality label, may supply two very different labels in terms of sustainability quality riteria in order to be present on this labels market This model an be extended by assuming a sequential hoie of their ertifiation level for NGOs and by assuming multi-tier labels as Fisher and Lyon (013) Referenes Aldashev, G and T Verdier (009) When Ngos Go Global: Competition on International Markets for Development Donations Journal of International Eonomis, 79(), Aldashev, G and T Verdier (010) Goodwill Bazaar: Ngo Competition and Giving to Development Journal of Development Eonomis, 91(1), Barry, I, Bonroy O, Garella, P G (014) Labeling by a Private Certifier and Publi Regulation Working Paper GAEL Ben Youssef, A and C Abderrazak (009) Multipliity of Eo-Labels, Competition, and the Environment Journal of Agriultural & Food Industrial Organization 7() Ben Youssef, A and R Lahmandi-Ayed (008) Eo-labelling, Competition and Environment: Endogenization of Labelling Criteria Environmental and Resoure Eonomis 41(): Bonroy, O and C Constantatos (015) On the Eonomis of Labels: How Their Introdution Affets the Funtioning of Markets and the Welfare of All Partiipants Amerian Journal of Agriultural Eonomis, 97(1), Bottega, L and J De Freitas (009) Publi, Private and Nonprofit Regulation for Environmental Quality Journal of Eonomis & Management Strategy 18(1): Bottega, L, P Delaote, et al (009) Labeling poliies and market behavior: quality standard and voluntary label adoption Journal of Agriultural & Food Industrial Organization 7 17

18 Bréard, D (014) Consumer Confusion over the Profusion of Eo-Labels: Lessons from a Double Differentiation Model Resoure and Energy Eonomis, 37(0), Fisher, C and T P Lyon (014) Competing Environmental Labels Journal of Eonomis & Management Strategy Fisher, C and T P Lyon (013) A Theory of Multi-Tier Eolabels WP Harbaugh, R, J W Maxwell, et al (011) Label Confusion: The Grouho Effet of Unertain Standards Management Siene 57(9): Heyes, A G and J W Maxwell (004) Private vs publi regulation: politial eonomy of the international environment Journal of Environmental Eonomis and Management 48(): Manasakis, C, E Mitrokostas, et al (013) Certifiation of orporate soial responsibility ativities in oligopolisti markets Canadian Journal of Eonomis/Revue anadienne d éonomique, 46(1), Poret, S and C Chambolle (007) Fair Trade Labeling: Inside or Outside Supermarkets? Journal of Agriultural & Food Industrial Organization 5(1) A Appendixes A1 Proof of Proposition 1 The result of the ertifiation game depends on profits omparisons It is trivial to see that π 1B (s A, s B ) = π B (s A, s B ) > 0 for all values of s A > s B Likewise, π 1A (s A, s B ) = π A (s A, s B ) > 0 when s A < θ k s B More, π 1A (s A, s B ) > π 1B (s A, s B ) when s A < θ k s B s B (4(θ k) 3s B ) = s A (s B ), with s A (s B ) > s B when s B < θ k 3 If s A > θ k s B, π A (s A, s B ) < 0 and sine π B (s A, s B ) > 0, hoosing the label B is the dominant strategy for firm, that is, firm always hooses to ertify its produt with the label B Knowing that firm always hooses the label B, firm 1 hooses also the label B sine its gain with label A will be lower than its gain with the label B (π 1A (s A, s B ) < 0) 18

19 If s A < θ k s B, π A (s A, s B ) > 0 and sine π B (s A, s B ) > 0, firm always hooses to ertify its produt with the label opposite of the one hosen by firm 1 Knowing that strategy, firm 1 ompares π 1A (s A, s B ) and π 1B (s A, s B ) Sine π 1A (s A, s B ) > π 1B (s A, s B ) when s A < θ k s B s B (4(θ k) 3s B ) = s A (s B ), firm 1 hooses the label A when s A < s A (s B ) and it hooses the label B when θ k s B > s A > s A (s B ) A Proof of Proposition Resolution of the NGO A s program: The program of the NGO A is : max s A U A (s A, s B ) = s α A (q A (s A, s B )) 1 α (A1) The FOC is the following: [ ] s α 1 A (q A(s A, s B )) α q A αq A (s A, s B ) + (1 α)s A s A = 0 (A) Sine q A s A = (θ k)s B+(8s A 4s As B s B ) (4s A s B ) < 0, there exists at least one solution to the equation (A) The seond order ondition U A s A < 0 indues the following ondition: s A > s B((θ k) s B )) 4α(θ k) (3α )s B The FOC is equivalent to the following quadrati equation in s A : 8s A (4α(θ k) (3α )s B )s A + ((θ k) s B )s B = 0 (A3) (A4) s B < The disriminant of the quadrati equation = 4(4(θ k) 3s B )(4α (θ k) (4 4α + 3α )s B ) = 4Y A is positive if and only if 4α θ k 4 4α+3α The lower real root is a loal minimum, sine it does not observe the SOC (A3) The higher real root is: s A (s B ) = 4α(θ k) (3α )s B + Y A 8 > 0 (A5) It is easy to heek that s A (s B ) < θ k s B The solution has also to observe the additional ondition, ie, s A (s B ) > s B When α < 5, 19

20 As s A (s B ) s B, if s B s A (s B ) < s B, if s B > When α > 5, 4α θ k ; 3(α+) 4α θ k 3(α+) s A (s B ) s B, if s B (4α 1) θ k ; 3(1+α) s A (s B ) < s B, if s B > (4α 1) θ k 3(1+α) 4α > 4α 3(α+) 4 4α+3α > (4α 1) 3(1+α) when α < 5 and 4α 4 4α+3α obtain the best response funtion of NGO A as follows: (i) when α <, 5 sbr A (s B) = (ii) when α, 5 sbr A (s B) = s A (s B ) if s B < 4α θ k 4 4α+3α s B if s B 4α θ k 4 4α+3α s A (s B ) s B Resolution of the NGO B s program: The program of the NGO B is : if s B < (4α 1) θ k 3(1+α) if s B (4α 1) θ k 3(1+α) > (4α 1) 3(1+α) > ; 4α when α >, we 3(α+) 5 max s B U B (s A, s B ) = s β B (q B(s A, s B )) 1 β (A6) The FOC is the following: [ ] s β 1 B (q B(s A, s B )) β q B βq B (s A, s B ) + (1 β)s B = 0 (A7) s B Sine q B s B = s A(θ k 3s A ) (4s A s B < 0 if and only if s ) A > θ k, there exists at least one solution to the 3 equation (A7) if and only if s A > θ k 3 If s A θ k 3, U B s B > 0, then s BR B (s A) = s A The seond order ondition U B is negative when s s A > θ k, sine q B B 3 s B The FOC is equivalent to the following quadrati equation in s B : = s A(θ k 3s A ) (4s A s B ) 3 < 0 βs B ((3 + β)s A (1 β)(θ k))s B + 4β(θ k + s A )s A = 0 (A8) The disriminant of the quadrati equation = ((θ k) 3s A )((1 β) (θ k) (1 + β)(3 β)s A ) = Y B is positive whatever s A The higher real root is a higher than s A, then it is not a valid solution 0

21 The lower real root of the quadrati equation (A8) is: s B (s A ) = (3 + β)s A (1 β)(θ k) Y B β > 0 (A9) The solution has also to observe additional onditions, ie, s B (s A ) < s A and s B (s A ) < θ k s A s B (s A ) < s A if and only if s A > 1+β θ k 3(1 β) > θ k 3 s B (s A ) < θ k s A if and only if s A < 1 θ k 1+β 1 Sine > 1+β when β < 1, we obtain the best response funtion of NGO B: 1+β 3(1 β) 4 s A if s A < 1+β θ k 3(1 β) (i) when β < 1 4, sbr B (s A) = (ii) when β 1 4, sbr B (s A) = s A s B (s A ) if 1+β θ k s 3(1 β) A 1 θ k 1+β θ k s A if s A > 1 θ k 1+β ; By solving the FOC (A7) as a quadrati equation in s A, this solution an be rewritten as the s A best response of NGO B as a funtion of s B : θ k s B if s B < 4β θ k 1+β (i) when β < 1, 4 sb BR A (s B ) = s B A (s 4β θ k B) if s 1+β B 1+β θ k 3(1 β) s B if s B > 1+β θ k 3(1 β) (ii) when β 1, 4 sb BR A (s B ) = s B with s B A (s B) = (3+β)s B 4β(θ k) YA B > θ k 3 and YA B = (4β(θ k) 3(3 β)s B)(4β(θ k) (1 + β)s A ) > 0 if s B > 4β θ k 1+β Quality equilibria To obtain quality equilibria, we equalize the two reation funtions The equality s A (s B ) = s B BR A (s B ) has two real solutions if and only if = Y = (1 3α) 4(4 + α( 5 + 3α))β + 4( α) β > 0, that is, if and only if α < α(β) = 3+β(4β 5) 4(1 β) 6β (3 β) In this ase, the two real solutions are s B = β(3 10β)α +(3 5β+4β )α 1+10β 4β (1 β+αβ) Y 3(1 β(α +(1 (1 α)α)β)) and < 1 3 or α > α(β) = 3+β(4β 5)+4(1 β) 6β (3 β) > 1 3 θ k s B = β(3 10β)α +(3 5β+4β )α 1+10β 4β +(1 β+αβ) Y θ k 3(1 β(α +(1 (1 α)α)β)) The assoiated values of s A are 1 ;

22 s A = β( 3+β)α +(3+5β 10β )α+1 β+4β +(1+β αβ) Y θ k 6(1 β(α +(1 (1 α)α)β)) and s A = β( 3+β)α +(3+5β 10β )α+1 β+4β (1+β αβ) Y θ k 6(1 β(α +(1 (1 α)α)β)) To end the proof we have to hek that the equilibrium andidates satisfy the following four onditions: (i) s B > 0 and s B > 0 α > 1 3 ; (ii) s A > θ k 3 and s A > θ k 3 α > 1 3 ; (iii) s A < θ k s B and s A onditions < θ k s B ; these onditions are satisfied without any additional (iv) s A > s B and s A > s B s A s B = (1 α) (7 5α+4α )β+( 3α+4α )β +(1 β) Y (1 β(α +(1 (1 α)α)β)) θ k If (1 α) (7 5α + 4α )β + ( 3α + 4α )β > 0, that is, α < (1 5β+6β )+ (1 β)(1+β(8+β( 91+46β))) 8β(1 β) = α(β), s A s B > 0 If (1 α) (7 5α + 4α )β + ( 3α + 4α )β < 0, that is, α > α(β), a neessary ondition is that α > 1 (1 β) s A s B = (1 α) (7 5α+4α )β+( 3α+4α )β (1 β) Y θ k (1 β(α +(1 (1 α)α)β)) If (1 α) (7 5α+4α )β +( 3α+4α )β < 0, that is, α > α(β), s A s B < 0 If (1 α) (7 5α + 4α )β + ( 3α + 4α )β > 0, that is, α < α(β), a additional neessary ondition is that α < 1 (1 β) Sine α(β) 1 (1 β) β, α(β) = 1 (1 β) when β = , and α(β) 1 (1 β) when β , we obtain the following quality equilibria: (i) If β > 1, then there are multiple equilibria: 4 [ ] 4α s B θ k 4 4α+3α s A = s B with, θ k when α < 5 [ ] s B (4α 1) θ k, θ k when α 3(1+α) 5 (ii) If 7 33 < β 1 and α < [ s A = s B with s B 1+β 3(1 β) (1 β) θ k, θ k, then there are multiple equilibria: ] ;

23 (iii) If β < 7 33 and α < α(β) = 3+β(4β 5)+4(1 β) 6β, then there are multiple equilibria: 16 (3 β) [ ] s A = s B with s B ; 1+β 3(1 β) θ k, θ k (iv) If β < 7 33 and α(β) < α < 1, then there are two equilibria: 16 (1 β) (s A, s B ) and (s A, s B ) with s A > s A and s B < s B ; (v) If α > α(β), then there are one unique equilibrium: (s A, s B ) 3