Label Battles: Competition among NGOs as Standard Setters

Transcription

1 Label Battles: Competition among NGOs as Standard Setters Sylvaine Poret Abstrat This paper examines ompetition among NGOs that at as standard-setting organizations. We onsider a double duopoly model wherein NGOs ompete to offer firms labels for sustainability quality and firms ompete to sell onsumers differentiated produts. We assume that NGO preferenes for standard levels differ, with some being mission-driven organizations and others being market-driven organizations. We find that these two NGO types must have very different preferenes to be present in the label market. Moreover, ompetition between these two types NGOs leads to a derease in standard provided by mission-driven NGOs and an inrease in overall weighted sustainability quality. Keywords: labels, NGOs, vertial produt differentiation, sustainability quality. JEL lassifiation: L13, L15, L31, Q01. Funding was provided by the Frenh Agene Nationale de la Reherhe (ANR) under the projet ANR-11-ALID- 000, OCAD (Offrir et Consommer une Alimentation Durable). ALISS UR1303, INRA, Université Paris-Salay, F-9400 Ivry-sur-Seine, Frane; Department of Eonomis, Eole Polytehnique, F-9118 Palaiseau, Frane. Postal address: INRA-ALISS 65 boulevard de Brandebourg 9405 Ivry-sur-Seine edex Frane. address: sylvaine.poret@ivry.inra.fr. 1

2 1 Introdution The Eolabel Index, whih is an existing diretory of labels, urrently traks 463 eolabels in 199 ountries and 5 industry setors, inluding the European Union organi produts label; Fairtrade International, an assoiation of 5 organizations around the world; the Marine Stewardship Counil (MSC), a standard for sustainable fishing; GlobalGAP, a private setor body for the ertifiation of agriultural produts; and the Non-GMO (Genetially Modified Organism) Projet, an organization offering independent verifiation of testing and GMO ontrols for produts in North Ameria. 1 A label is a logo that indiates that a produt or ompany has met a standard. A standard is part of a governane mehanism designed to ensure sustainable development, a tripartite standards regime that inludes standard-setting organizations, ertifiation bodies and areditation authorities (Loonto and Bush, 010). In this artile, we onsider only standard setters. Standards are set by different types of ators: governments, industries, approved ertifiation bodies, and non-governmental organizations (NGOs). Aording to the 010 Global Eolabel Monitor, most eolabels (58%) were operated by non-profit organizations, 18% by for-profit organizations, 8% by governments, and the remainder being omposed of other ators (e.g., industry assoiations, hybrid for/non-profit partnerships, publi-private partnerships) (Big Room In. and World Resoures Institute, 010). On the orporate side, more than one-third of multinational ompanies have voluntary thirdparty ertifiations for environmental or soial standards (Kitzmueller and Shimshak, 01). NGOs appear to be preferred as standard-setting partners by firms in many fields, inluding sustainable agriulture, fishing, pakaging, supply hain management, labor issues, renewable energy, forest resoures, health, and safety. The inreasing presene of NGOs and the trust they arouse among itizens/onsumers 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. Their primary motivation is money. Indeed, the inreasing sarity of publi funds and the inreasing 1 The 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 number of NGOs fore them to find new soures of funding. Beause orporations enjoy relatively easy aess to finanial resoures, NGOs are motivated to establish allianes. Another motivation for NGO ollaboration with orporations is raising people s awareness of soietal problems. Indeed, a partnership provides one way to sensitize orporate lients to an NGO s ause. Moreover, a positive onsequene of suh partnerships is an inrease in notoriety: an assoiation with a firm that oupies a strategi position in the market is one way for an NGO to strengthen its reputation, publi image and politial influene (Selsky and Parker, 005; Austin and Seitanidi, 01). The roles of standard setters and their relationships with firms these roles imply offer both opportunities and risks for NGOs. An NGO s reputation and legitimay may inrease through ooperation with a reputable partner. Conversely, an NGO s reputation may be damaged if a partner is involved in a sandal. Likewise, an NGO may fae serious reperussions if a partnership sours. It may lose its redibility and legitimay among onsumers/itizens, orporations, and other organizations, and redibility and legitimay onstitute ritial forms of apital for NGOs (Poret, 014). For example, a risk of greenwashing, beyond undermining the firm s reputation, is spillover to the NGO partner. Suh spillover is more likely to our when the partnership is materialized through a produt label, whih onnets the NGO s name to the firm s brand. Another risk is dependeny. An NGO needs orporations to implement its standards to ahieve its objetives and, thus, to exist. Firms offering labeled produts pay liense fees, whih represent a revenue soure, to the NGO to use its label/logo. Beause of their large market shares, volumes traded and sales made, large mainstream ompanies are the largest revenue raisers. This reates a dangerous dependeny between NGOs and onventional firms. Some mainstream ompanies have also developed standards in assoiation with either NGOs or ertifiation bodies. Finally, the development of sustainability labels has reated a real market of labels whose proliferation reates ompetition among them. The risk is then that a bad label drives out a good one, that is, a less stringent and less ostly standard beomes leader on the market and the benhmark for the onept. The ompetition among NGOs as standard-setting organizations is the entral point of this paper. A good example of this phenomenon is the Lipton-Rainforest Alliane partnership and the evolution of Fairtrade label. 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 For instane, the onept of fair trade has experiened an impressive expansion following the launh of the Max Havelaar label (Fairtrade) for brand-name produts and private-label produts sold in large retail stores (Poret, 010). 3

4 by Unilever, were to seure its supply through a long-term partnership; to rebuild Lipton s market share; to reover potential inreases in supply ost through sales growth; and to obtain a first-mover advantage in the tea market, as no other major tea brands had initiated this type of approah. These objetives suggested that an alliane with an NGO might provide the best solution for Lipton to establish a tripartite standards regime with a label. Three labels developed by NGOs were onsidered by Unilever: Fairtrade (or FLO), UTZ Certified, and Rainforest Alliane. Unilever hose the Rainforest Alliane based on their ommon approah, whih inludes the ability to work on an international sale with both large-sale plantations and small farmers, the use of market-based premium for farmers, the ability to help move an entire industry and the same perspetive of sustainability and mainstream strategy 3 (Poret, 010). With this partnership, the Rainforest Alliane an benefit from the notoriety and visibility of the Lipton brand, espeially in Europe where the NGO and its logo were not well known. The Rainforest Alliane aims to onserve biodiversity and ensure sustainable livelihoods by transforming land-use praties, business praties and onsumer behaviors. The Rainforest Alliane sustainable agriulture standard, like the UTZ Certified standard, does not offer produers a minimum guaranteed prie as required by the Fairtrade sheme, thus leaving them vulnerable to market prie flutuations. Therefore, Unilever hose a less demanding standard in terms of soial riteria. Fairtrade International 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, all ingredients that an be ertified must be and a minimum of 0% of the total produt must be omposed of Fairtrade-ertified ingredients. The FSP would shift this poliy and use a new logo to ertify produts ontaining only one ertified ingredient sugar, ooa, or otton even if the ingredient represents 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 either do not want to ommit to the full ost of ertifying their produts or are only interested in partiular ommodities. This new labeling sheme raises questions, espeially in the ooa setor wherein reurring supply shortages and hanging demand has moved the global ooa value hain toward more sustainable prodution proesses. Indeed, most major hoolatiers have announed they will be Fairtrade, UTZ Certified, or Rainforest Alliane ertified by 00. These two latter NGOs 3 Tensie Whelan, 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. 4

5 are more reent and attrative to manufaturers beause they have less demanding eonomi and soial standards than the Fairtrade label. This implies the Fairtrade label was losing market share. Aording to organizations suh as Oxfam, this loss may explain the development of the FSP. Nine ompanies signed up for the FSP when it launhed in 014. Indeed, Mars and other major brands, suh as Rewe and Lidl, were among the first to ommit to the FSP. All hoolate bars ontain sugar, ooa and other ingredients that an be ertified; thus, the risk is a derease in demand affeting produers of ertified sugar, nuts and vanilla beause major hoolate brands would no longer have to buy these ingredients under fair trade onditions to use a Fairtrade label. Some observers also highlight that the new ertifiation may onfuse onsumers and risks marginalizing the traditional Fairtrade label and eroding its redibility. Voluntary labels with similar riteria are inreasingly being established by NGOs. This paper proposes to analyze the ompetition among NGOs ating as standard-setting organizations. Our aim is to examine the strategies used by some NGOs in the ompetitive ontext of the label market. Despite the importane of NGOs presene, eonomi analyses of ompetition among NGOs are rare. Suh ompetition is studied in their fundraising ativities in the donation market. Rose- Akerman (198) models NGOs that differ along one dimension, ideology, to deide whih portion of donor revenues to devote to fundraising efforts. The main result is that ompetition for donations leads NGOs to engage in exessive fundraising in the setor. In Aldashev and Verdier (009, 010), horizontally differentiated NGOs at as produers of goods and servies in developing ountries and ompete with eah other in fundraising ativities (e.g., diret mailing, door-to-door ampaigns, advertising in the media, organizing dinners). Aldashev and Verdier (009) explain the phenomenon of the internationalization of major development NGOs similarly to that of multinational firms. Aldashev and Verdier (010) examine a model in whih NGOs alloate their time between working on a projet and engaging in fundraising. They find that with free entry of NGOs, the equilibrium number of NGOs an be either larger or smaller than the soially optimal number, 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 of this topi). A substantial body of literature ompares standard levels by the type of standard-setting organization: government, NGO, or industry (Heyes and Maxwell, 004; Bottega and De Freitas, 009; Bottega et al., 009; Manasakis et al., 013). Fisher and Lyon (014, 013) examine ompetition between an NGO and a for-profit industry 5

6 assoiation. Fisher and Lyon (014) find that the environmental benefits may be smaller in the presene of both labels than in the presene of the NGO label alone. Fisher and Lyon (013) show that when the number of firms is fixed, the industry sets an ambitious binary standard, while 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. In these papers, the objetive of the NGO is to maximize environmental quality or minimize a speifi harm, whih is usually related to an externality. Theoretially, our model is based on the quality ompetition literature in the ase of a partially overed market. Ronnen (1991), Motta (1993), Wauthy (1996) and Amaher et al. (005) onsider quality hoies using duopoly models of vertial produt differentiation, where firms simultaneously hoose the quality of the produt and then ompete on prie. For onsumers and firms, our model follows the hypotheses proposed in Motta (1993) and Amaher et al. (005), who study a duopoly equilibrium with the haraterization of firm quality hoie under partial market overage for both variable and fixed quality osts. This study differs from previous works in several ways. Most importantly, we model rivalry between two labels reated by different NGOs, that is, by two organizations of the same type. We nevertheless suggest that the NGOs preferenes an be very different. Some NGOs are missiondriven organizations whose ativities are exlusively ause oriented, with a strong ommitment to values suh as ensuring fair trade or preventing hild labor. Their objetives are then learly oriented toward the stringeny of their standards, that is, the quality of the label. Other NGOs ollaborate with large ompanies and often offer made-to-measure standards. These NGOs may be seen as market-driven organizations whose objetives stimulate trade to fully promote their auses. 4 We assume that NGOs seek to maximize a utility funtion in whih they trade off between the quality and quantity of produts sold under their label. That is, in the ontext of NGO-reated sustainability labels, NGOs may have an impat on an issue through two hannels: quality or quantity. We then onsider a duopolisti vertial differentiation model with two sustainability labels whose quality levels are endogenously hosen by eah NGO. Our key finding is that the oexistene of both labels is possible only if the NGOs preferenes in terms of sustainability 4 This terminology is borrowed from Raynolds (009), who distinguishes among mission-driven, qualitydriven and market-driven orporations, a ontinuum that represents an inreasing interest in traeability rather than in partnership. 6

7 quality are extremely different. Competition between the NGOs indues a derease in the level of the most stringent sustainability quality standard relative to its monopoly standard. Moreover, ompetition indues an inrease in the overall weighted sustainability quality. The remainder of this paper proeeds as follows: Setion presents the model. Setion 3 analyzes the firms hoies for pries and labels. Setion 4 haraterizes the equilibrium labeling sheme for the two NGOs and ompares the results with the benhmark ases. Finally, Setion 5 onludes. The Model We develop a Bertrand duopoly model of vertial differentiation. Sustainability quality is the vertial differentiation variable. It represents some omposite harateristi expeted to objetively and synthetially measure the attention paid by the firm to sustainable development. It an be viewed as a measure of firm CSR ativities. Sustainability quality is promoted by two NGOs ating as standard setters, A and B, whih an propose two different labels with sustainability quality level s j, with s j > s 0 for j = A or j = B. Following Garía-Gallego and Georgantzís (009), it is assumed that the standard produt with low sustainability quality s 0 is sold at the ompetitive prie by a ompetitive fringe of firms, whih do not adopt any labels. For simpliity, we assume that s 0 = 0. Therefore, if one of the two firms wants to sell the produt at a higher prie than the ompetitive one, potentially yielding positive profits, it has to adopt a label guaranteeing the sustainability quality of the good. We present the model for the ase where s A > s B, and the results are given for both ases, s A > s B or s B > s A..1 Firms On the supply side of the produt market, we onsider two symmetri firms, 1 and. The firms marginal osts depend on the hosen label and are defined as (s j ) = ( s j + k)s j for j = A or B. (1) The marginal ost funtion (s j ) has two omponents. The first omponent, s j, represents the quadrati ost of providing sustainability quality for firms. The marginal ost of meeting the label 7

8 j requirements is independent of the quantity of good produed but stritly inreasing and onvex in the sustainability quality level s j. The seond omponent, k s j, is the ost of ertifiation that is paid to a third party, whih is not onsidered here. The parameter k represents the unit ost of ontrolling label riteria if the sustainability quality level s j is viewed as a number of preise riteria ertified by the label j.. Consumers We adopt a vertial differentiation framework that is onsistent with Mussa and Rosen (1978). Consumers an observe the label hoies of firms and have the utility funtion u = θs j p j (and zero utility if they do not buy the differentiated good). They differ in their tastes for sustainability quality, as desribed by the parameter θ [θ, θ], where θ is uniformly distributed with unit density. The higher the quality s j of the good, the higher the utility u obtained by onsumers for any given prie p j. However, onsumers with higher θ will be willing to pay more for higher sustainability quality goods. Considering that onsumer awareness of sustainable development results in a higher willingness-to-pay for a sustainable produt than for a standard one, the parameter θ represents the level of onsumer sustainability awareness. We assume that the onsumer with the highest valuation for sustainability quality is willing to pay the unitary ost of the labeled riteria, θ > k. Consistent 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 label j, onsumers are ertain that the quality level is s j, as the third-party ertifiers are trustworthy. When two different labeled produts are available in the market, 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 labeled by NGO A rather than the alternative good labeled by NGO B, while onsumers haraterized by θ AB > θ > θ B obtain a higher utility from onsuming the quality set by NGO B rather than the standard produt. The utility funtion implies the following demand funtions for the produt 8

9 labeled by NGO j, j = A, B, and for the standard produt q A (p A, p B, s A, s B ) = θ θ AB () q B (p A, p B, s A, s B ) = θ AB θ B (3) q (p B, s B ) = θ B. (4) When only one label is present in the market, the respetive demand funtions for the highquality produt and for the standard produt are q j (p j, s j ) = θ θ j (5) q (p j, s j ) = θ j θ, with j = A or B. (6) Note that in both ases, the quality market is not overed, i.e., some onsumers do not buy the ertified good. Partial market overage also requires that θ < θ j for j = A or B. More preisely, the unovered market overage ondition implies that p B s B > θ at equilibrium with two standards when s B < s A, that is, θ < k NGOs In the absene of publi intervention on a sustainability issue, NGOs offer their labels to firms to provide onsumers with redible information about the sustainability quality of the labeled variant, whih is otherwise unobservable. The objetive of the NGOs onstitutes the most important hypothesis of the model. Most of the literature on eolabels (Heyes and Maxwell, 004; Bottega and de Freitas, 009; Fisher and Lyon, 013, 014; Bréard, 014) assumes that an NGO maximizes average environmental quality. This objetive is pro-environmentally motivated and is related to the provision of a publi good. Our idea is more onsistent with the non-profit literature. Rose-Akerman (198) assumes that the managers of harities maximize revenue from fundraising. 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. In this ontext, NGOs are assumed to be onerned 5 Wauthy (1996) onsiders the haraterization of the firm quality hoie in terms of degree of population heterogeneity without making an assumption ex ante about whether the market is overed. Here, we verify that total market overage is not an equilibrium. 9

10 only with their own programs, that is, the soial output they individually produe (Sharf, 014; Heyes and Martin, 015). In the same way, we onsider that an NGO ares only about the label it has developed. As the level of the standard it offers to firms has an impat on the volume or size of the market impated by its label, the NGO is interested in both the level of its quality standard and the quantity of produts with its label. Therefore, in our model, it is assumed that NGOs realize trade-offs between the quality of their labels and the quantity of labeled produts sold. Moreover, eah NGO has its own preferenes about the quality of the label it offers. This allows us to distinguish mission-driven NGOs from market-driven NGOs. To formalize this idea, following Poret and Chambolle (007), we assume that the NGO objetive is to maximize a Cobb-Douglas utility funtion that depends positively on the sustainability quality and on the quantity of labeled produt sold, 6 with different preferenes for quality. For NGO A U A (s A ) = s α A(q A (s A, s B )) 1 α, (7) where α is NGO A s quality preferene parameter, with α (0, 1). Likewise, 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, (8) where β is NGO B s quality preferene parameter, with β (0, 1). We assume that NGO A is a more mission driven than NGO B, that is, α > β..4 The Game The following game is onsidered. In the first stage, the NGOs present in the market hoose the level of standards required to obtain their label, given their respetive objetives. Their hoies are simultaneous. 7 In the seond stage, the two firms, 1 and, sequentially hoose whether and whih label to adopt. Following Bottega et al. (009), we assume that the hoie to label is sequential. Bottega et al. (009) argue that in real world, labeling proesses are usually slow, as 6 Poret and Chambolle (007) speifially examine the Fairtrade label and propose that the utility of the Fairtrade ertifier depends positively on the Fairtrade wholesale prie, whih determines small produers revenue, and on the Fairtrade produt quantity sold, whih represents the number of small produers in the Fairtrade network. 7 No analytial solution was obtained using Mathematia for a sequential game in whih an NGO sets a standard before its rival does. 10

11 few firms adopt labels in the earlier stages of implementation. This may be explained by the fat that voluntary labeling requires firms to adapt their prodution or trade praties. We assume that the label hoie is sequential to avoid multipliity of equilibria. This does not modify the firms hoie at equilibrium, but it allows the seletion of an equilibrium when more than one exists. 8 We assume that firm 1 is the Stakelberg leader and that firm is the follower. In the third stage, if they have both hosen a label, firms set simultaneously pries. In the final stage, onsumers hoose whether or not to buy goods with sustainability label A or B. This game is solved by bakward indution. We ompare results of this game with benhmark ases in whih only one NGO is present in the label market. We denote profits as π jj for a firm that has either hosen a label or hosen not to adopt one, strategy j with j = A, B or, given that its ompetitor has either hosen a label or hosen not to adopt one, strategy j = A, B or. When a firm deides not to adopt a label, it joins the ompetitive fringe and thus obtains zero profit..5 The Benhmark Model In the benhmark model, we onsider a non-ompetitive situation in the label market. For presentation, we assume that only NGO A provides a sustainability quality standard for the two firms. Then, the demand funtion for the sustainability quality produt is given by Equation (5) with j = A. In the third stage of the game, if only one firm has adopted the label, it has a monopoly position on the quality good market, and its program is the following max p A π A (p A, s A ) = [p A (s A + k)s A ]q A (p A, s A ). (9) The resolution yields equilibrium profits π A (s A ) = s A(θ k s A ) 4 > 0. The other firm joins the ompetitive fringe and obtains zero profit (π A = 0). If both firms hoose to adopt label A, the lassi Bertrand game applies, and they obtain zero profits (π AA = 0). In the seond stage, firms sequentially hoose to whether to adopt label A. The extensive form of the label game is depited in Figure 1. To simplify the analysis, we assume that if a firm is indifferent between adopting and not adopting a label beause of Bertrand ompetition, the firm does not adopt the label beause there 8 See Ben Youssef and Lahmandi-Ayed (008) for an idential assumption in the ontext of quality hoie. 11

12 Firm 1 A Firm Firm A (0,0) (,0) A (0, ) (0,0) Figure 1: The label game with one standard are internal transation osts to organizing a tripartite standards regime. Then, it is straightforward to see that the unique subgame equilibrium is for firm 1 to adopt label A and for firm to join the ompetitive fringe. When only label A is present on the market, NGO A sets the sustainability quality level to maximize the following objetive U A (s A ) = s α A(q A (s A )) 1 α with q A (s A ) = θ k s A. (10) ( ) The unique solution to this program is s 0 A = α θ k, and the total quantity of high-quality goods ( ) sold is equal to qa 0 = (1 α) θ k. 3 Firm Competition A game with two potential labels ertifying the sustainability quality is onsidered. We begin by solving the third stage of this game in whih firms hoose their pries as a funtion of their preeding hoie of labels. Then, the firms label hoie problem is solved. 3.1 Prie Competition Three types of market outomes must be onsidered. No Differentiation: When both firms hoose the same label, the lassi Bertrand game applies. Both firms offer the same prie p = (s j + k)s j with j = A or B, depending on the label seleted. This provides zero profits for both firms (π AA = π BB = 0). Differentiation with one label: When only one firm hooses a label, as in the benhmark model, this firm has a de fato monopoly position. Its program is the following max p j π j (p j, sj) = [p j (s j + k)s j ]q j (p j, s j ), for j = A or B. (11) 1

13 The equilibrium firm profit after adopting the label is π j = s j(θ k s j ) 4. The other firm joins the ompetitive fringe and obtains zero profits (π j = 0 for j = A or B). Differentiation with two labels: When two firms hoose different labels (here, when s A > s B ), they both have some market power due to produt differentiation. The firm that has hosen label A now solves the following profit maximization program max p A π AB (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 ). (1) The firm that has previously hosen label B solves the following profit maximization program max p B π BA (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 ). (13) The first order onditions (FOC) give the 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 ], (14) 4s A s B s B [(s A s B )θ + (s A + k)s A + (s B + k)s A ]. (15) 4s A s B These expressions imply that the high-quality firm sets a prie that is higher than the prie harged by the low-quality firm. Note that the loser s B is to s A, the loser the solution is to a Bertrand solution. Moreover, when the low-quality label beomes more stringent, the low-quality produt beomes a loser substitute for the high-quality produt. Prie ompetition will intensify, so the prie differene will derease. Conversely, when the level of the high-quality standard inreases, the high-quality produt beomes a poor substitute for the low-quality one. Prie ompetition will beome less intense, so the prie differene will inrease. 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 )], (16) 4s A s B s A [(θ k) + (s A s B )] > 0. (17) 4s A s B These funtions imply that the quantity of produts labeled by NGO A is positive if s A + s B < θ k. (18) Two sustainability labels are present in the market only if their levels are relatively low ompared ( ) to the demand/ost ratio of supplying a labeled produt. In other words, at the prie ompetition stage, two stringent labels an oexist only if onsumers sustainability awareness is high 13 θ k

14 and the osts related to quality and ertifiation are low, that is, when it is ost effiient for firms and NGOs to implement and ontrol sustainability quality, respetively. The firm profits are then π AB (s A, s B ) = s A (s A s B ) ( (θ k) (s A + s B ) ), (19) (4s A s B ) π BA (s A, s B ) = s As B (s A s B ) ( (θ k) + (s A s B ) ). (0) (4s A s B ) It is possible to hek that firm profits are onave at the level of the label it has hosen Label Choie In the seond stage, the two firms, 1 and, sequentially selet a label or hoose not to adopt either available label. The extensive form of the ertifiation game is depited in Figure. Firm 1 A B Firm Firm Firm A (0,0) B (, ) (,0) A (, ) B (0,0) (,0) A (0, ) B (0, ) (0,0) Figure : The label game with two standards When s A > s B, π AB = s A (s A s B ) ( (θ k) (s A + s B ) ) (4s A s B ), π BA = s As B (s A s B ) ( (θ k) + (s A s B ) ) (4s A s B ) > 0, π A = s A(θ k s A ) 4 > 0 and π B = s B(θ k s B ) 4 > 0. We obtain symmetri results when s B > s A. This allows us to state the equilibrium strategies with the two possibles ases, either s A > s B or s B > s A, in the following proposition. 9 If we look for the solution to the quality game when quality levels are hosen by both firms simultaneously, we obtain results similar to those of Motta (1993) and Amaher et al. (005), where the osts of providing quality are variables in terms of prodution, that is, s A = θ k, and s B = θ k, where s A > s B. 14

15 Proposition 1 (Firms Equilibrium Strategies). In a duopoly model with vertial differentiation, the results of the label game are the following: (i). if s A < s A (s B ) with s A (s B ) = θ k s B s B (4(θ k) 3s B ), firm 1 will adopt the more stringent label, and firm will adopt the less stringent label strategy (A, B) if s A > s B and strategy (B, A) if s B > s A ; (ii). if s A (s B ) s A < min { θ k s B, ( θ k) s B}, firm 1 will adopt the less stringent label, and firm will adopt the more stringent label strategy (B, A) if s A > s B and strategy (A, B) if s B > s A ; (iii). if s A min { θ k s B, ( θ k ) s B}, firm 1 will adopt the less stringent label, and firm will not adopt any label strategy (B, ) if s A > s B and strategy (A, ) if s B > s A. Proof. See appendix A.1. The results of the label game are represented in Figure 3. s A q ê - k ÅÅÅÅÅÅÅÅÅÅÅÅ ( ) (, ) = (,) (, ) q ê - k ÅÅÅÅÅÅÅÅÅÅÅÅ 3 (,) (,) ( ) (,) q ê - k ÅÅÅÅÅÅÅÅ ÅÅÅÅÅÅÅ 3 Hq ê - kl ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ ÅÅÅÅÅÅ 3 q ê - k ÅÅÅÅÅÅÅÅ ÅÅÅÅÅÅÅ s B Figure 3: The label hoie The oexistene of two labeled produts in the market is not possible if the levels of both labels ( ) are similar to eah other and to the demand/ost ratio of supplying a labeled produt. Nor is this possible if the level of the most stringent label is very high (ase (iii) of proposition 1). First, 15 θ k

16 when both labels are stringent in relation to the demand/ost ratio of supplying a labeled produt, the sustainability quality market is small. Hene, firms do not fight over a market nihe. Seond, when the most stringent label is too stringent, it is not profitable for the firms to hoose it. In any ase, the leader hooses the less stringent label to benefit from a monopoly situation in a larger nihe market. When two labeled produts oexist in the market ( ) s A < min { θ k s B, ( θ k) s B}, the leader hooses to adopt the less stringent label if s A > s A (s B ) and hooses to adopt the more stringent label if s A < s A (s B ). The follower always hooses the opposite strategy. These hoies an be explained as follows. Firms have an interest in avoiding diret prie ompetition by differentiating their produts using different labels only if the sustainability quality market is largely overed, that is, if the level of the less stringent label is relatively low. Indeed, the quality level of the less stringent label defines the size of the sustainability quality market. This an be alled the market overage effet. It indues that an inrease in the low-quality standard of its rival dereases the ( marginal profit from hoosing the high-quality standard πab (s A,s B ) s B < 0 when s A > s B ). When the less stringent label requires a low quality level, the sustainability quality market is large. Additionally, when the more stringent label also requires a relatively low quality level, it is profitable for the leader to adopt this label to take full advantage of the market overage effet. When the most stringent label requires a intermediate quality level, it remains profitable for the leader to adopt it. In this ase, the firm takes advantage of the produt differentiation effet by setting a high prie. However, when the less stringent label requires a intermediate quality level, the market size is redued, and produt differentiation through quality is also limited. As an inrease in the high standard level of the rival inreases the marginal return from hoosing the low standard level ( πba (s A,s B ) s A > 0 when s A > s B ), the leader hooses to adopt the less stringent label. Moreover, it is trivial to show that the follower always hooses the leader s opposite strategy. Indeed, firm obtains zero profits whenever it imitates the leader s strategy by hoosing the same label, while it obtains positive profits by hoosing the other label. 4 NGO Competition In this setion, we analyze the strategi behaviors of NGOs as sustainability quality standards setters through the hoie of the quality level required to obtain their standard. 16

17 4.1 Sustainability Quality Choie When both labels are present in the market, we assume that NGOs simultaneously hoose the sustainability quality level of their standard. The solution is presented for the ase wherein s A > s B. The maximization program of 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 )). (1) 4s A s B From the FOC, we obtain the following best response funtion of NGO A s BR A (s B) = 4α(θ k) (3α )s B+ 4α θ k Y A when α < 4 4α+3α if s 8 B < 5 (4α 1) θ k when α 3(1+α) 5 with Y A = (4(θ k) 3s B )(4α (θ k) (4 4α + 3α )s B ); otherwise, the orner solution s B annot be retained, as s A is stritly higher than s B. The best response of NGO A is to differentiate its own label from the rival label by setting a higher sustainability quality standard when possible, that is, when the level of NGO B s standard, s B, is relatively low. The maximization program of 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 )). () 4s A s B From the FOC, we obtain the best response funtion for NGO B s BR B (s A) = (3+β)s A (1 β)(θ k) Y B if s β A 1+β θ k 3(1 β) with Y B = ((θ k) 3s A )((1 β )(θ k) (1 + β)(3 β)s A ); otherwise, the orner solution s A annot be retained, as s A > s B. The best response of NGO B is to differentiate its own label from the rival label by setting a lower sustainability quality standard when possible, that is, when the level of NGO A s standard, s A, is relatively high. We an then haraterize the result as follows. Proposition (NGOs Equilibrium Strategies). In a double duopoly model with vertial differentiation, the results of the NGOs ompetition game are the following standards levels: (i). when α 1 (1 β), there is a unique equilibrium (s A, s B ), with s A > s B ; 17

18 (ii). when α(β) < α 1 and β < 7 33, there are two equilibria (s (1 β) 16 A, s B ) and (s A, s B ), with s A > s A > s B > s B ; (iii). in the other ases, there is no equilibrium when two NGOs offer different labels. Proof. See appendix A.. The results of the NGOs ompetition game are represented in Figure 4. a 1 () (, ) 1 (1 ) () è!!!!!! 33-1 ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ ÅÅÅÅÅÅÅ 8 1 ÅÅÅÅ () 1 ÅÅÅÅ 3, (, ) () () = 7- è!!!!!! 33 ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ 16 1 ÅÅÅÅ 4 1 ÅÅÅÅ 3 b Figure 4: The quality hoie In a double duopoly model wherein NGOs ompete to set quality standards through labels awarded to firms that omply with its standards, the oexistene of both labels is possible only if the NGOs preferenes for sustainability quality are extremely different. The general insight of this proposition is as follows. Firms must differentiate themselves from their rivals to generate profits, and NGOs must differentiate themselves based on the quality standards that they offer to be hosen by the firms. This implies two onditions. First, the sustainability quality market must be suffiiently large to allow these two NGOs to operate in label market. Due to the market overage effet, the less stringent standard must be very low. As it is assumed that NGO A is 18

19 more a mission-driven organization than is NGO B (α > β), the sustainability quality preferene parameter of NGO B must be very low (β < 1/4). Seond, due to the produt differentiation effet, both NGOs must also differentiate themselves from eah other by offering very different standards. Thus, the sustainability quality preferene parameter of NGO A must be relatively ( ) high α > 1. Therefore, there is suffiient spae in the label market for two sustainability (1 β) quality standards when NGO A is learly a mission-driven organization and NGO B a marketdriven organization. 4. Impats of NGO Competition In this setion, we ompare the previous results with those obtained in a non-ompetitive situation, that is, the benhmark model. In these latter ases, the only NGO in the market establishes its monopoly standard at the level s 0 j, with j = A or B, as determined in Subsetion.5. Proposition 3. Competition between the two NGOs leads to (i). a derease in the level of the standard provided by the mission-driven NGO (s A < s0 A ) and (ii). an inrease in the level of the standard provided by the market-driven NGO (s B > s0 B ). Proof. See appendix A.3. Due to ompetition, NGO A dereases the level of its standard, and NGO B inreases the level of its own standard. These results are explained by the fat that, in equilibrium, the quality hoies of NGOs are strategi substitutes. The explanations are not symmetri, as an inrease in standards levels does not mean the same thing in terms of ompetition for labeled produts. Indeed, one an easily hek that sbr A (s B) s B < 0 beause s B < 4α θ k 4 4α+3α. If NGO B inreases the level of its sustainability quality standard, this less stringent standard defines the size of the sustainability quality market, and the sustainability quality market beomes smaller. As the potential differentiation produt effet is redued, firms are less likely to hoose label A. To remain in the label market or retain some market share of this smaller market, NGO A redues the level of its own standard. In other words, an inrease of the level of the less stringent standard implies an inrease in ompetition between the two sustainability quality standards and thus between the sustainability quality produts as the labeled produts beome more similar. Then, the response of NGO A intensifies ompetition. 19

20 In the same way, one an hek that sbr B (s A) s A < 0 when β < 1 and s 4 A < 1 1+β θ k ; otherwise, s BR B (s A) s A 0. Moreover, the equilibrium level of NGO A s label s A is lower than 1 1+β θ k. If NGO A inreases the level of its sustainability quality standard, the response of NGO B is to derease the level of its own standard. An inrease in the level of the more stringent standard, label A, implies dereasing ompetition between the labeled produts and, thus, between firms. The response of NGO B intensifies this effet, that is, it redues ompetition between firms. Indeed, an inrease in the level of label A indues a derease in the demand for the produt labeled by NGO A and an inrease in the demand for the produt labeled by NGO B. As NGO B is a market-driven organization and thus plaes greater value on the quantity of the labeled produt than on its quality, it reinfores this inrease in quantity by dereasing the level of its standard. This pattern is mainly due to the benefits of relaxing prie ompetition by dereasing s B in response to an inrease in s A, whih tends to dominate the loss in utility of doing so. A strategi relationship between the NGOs is surprising. The fat that NGOs quality hoies are strategi substitutes intensifies or relaxes ompetition in the quality produts market. This is explained by the NGOs preferenes. If NGO B dereases its quality, we would perhaps expet NGO A to respond by also dereasing its quality to inrease demand. Instead, NGO A responds by inreasing its quality. This is explained by the fat that it is a mission-driven organization. The intuitions behind the results of proposition 3 differ from that of the inumbent NGO in the benhmark framework. If the inumbent NGO is A, ompetition indued by the entry of NGO B into the label market represents an inrease of the level of label B, as if s B was initially equal to s 0. As quality levels are strategi substitutes, this leads to a lower equilibrium value of the more stringent quality standard: s A < s0 A. On the ontrary, if the inumbent NGO is B, ompetition indued by the entry of NGO A represents a derease in the quality level of label A, as if s A was initially greater than θ k sustainability quality standard: s B > s0 B. s B. In this ase, NGO B s response is to inrease of the level of its own We an attempt to ompare sustainable development improvements between the benhmark model and the ompetitive model by using weighted sustainability quality. Proposition 4. Competition between the NGOs leads to an inrease in overall weighted sustainability quality regardless of the benhmark model (i). s A q A + s B q B > s0 A q0 A > s A q A ; 0

21 (ii). s A q A + s B q B > s B q B > s0 B q0 B, for all α ]1/3, 1[ and β ]0, 1/4[. Proof. See appendix A.4. Competition allows for an improvement in overall weighted quality regardless of the monopoly situation onsidered as a benhmark. However, the explanation of these results differs by the benhmark model in question. Due to ompetition, the mission-driven NGO A redues the level of its sustainability quality standard and might experiene a derease in the quantity of produts labeled with its standard when its preferene parameter is relatively high (α > α 1 (β), see Figure 4 and Appendix A.4). As a result, the weighted sustainability quality of its standard dereases with the entrane of a market-driven NGO into the label market (s 0 A q0 A > s A q A ). Therefore, the inrease in the overall weighted sustainability quality is related to the entry of NGO B, as its low standard inreases the quantity of produts with its sustainability label. In other words, when the benhmark ase is NGO A s monopoly in the label market, the inrease in overall weighted sustainability quality with the introdution of ompetition to the label market is due to a quantity effet. When the benhmark ase is NGO B s monopoly in the label market, that is, a situation in whih a market-driven organization is the only standard setter, the entry of the opposite type of NGO as a standard setter inreases the level of NGO B s standard and thus dereases the quantity of produts sold at this sustainability quality standard. The quality effet overompensates for the quantity effet in this ase; therefore, the weighted sustainability quality of produts with label B inreases in the ompetitive model (s B q B > s0 B q0 B ). The overall weighted sustainability quality also inreases through this quality effet. Indeed, the overall onsumption of labeled produts under ompetition might be lower than in the monopoly ase when only NGO B is a standard setter when the preferene parameter of NGO A is relatively high, (α > α (β), see Figure 4 and Appendix A.4). 5 Conlusion We have developed a simple model of ompetition between two NGOs that may have different preferenes for sustainability quality. We first found that two stringent sustainability quality labels annot oexist in a duopoly market with symmetri firms if onsumer sustainability awareness is 1

22 low and/or quality- and ertifiation-related osts are high with respet to the standard levels. A trade-off between a market overage effet and the lassi produt differentiation effet exists for firms. Seond, the two NGOs, whih ompete to offer the firms a sustainability quality label, may supply two labels with very different sustainability riteria, whih implies that when two NGOs are present in the label market, one must be a mission-driven NGO and the other a market-driven NGO. Third, ompetition between these NGOs dereases the most stringent standard. This means that the most mission-driven NGO, whih has a high-quality standard when it is alone in the label market, dereases the level of its standard when it faes ompetition from another NGO. This behavior is explained by the fat that NGOs quality hoies are strategi substitutes in the ontext of vertial differentiation. A bad label drives out a good one as the mission-driven NGO with a preferene for high quality weakens its standard when a market-driven NGO is also present in the label market. Finally, ompetition in the label market inreases overall weighted sustainability quality beause the entrant market-driven NGO labels many produts or the inumbent marketdriven NGO inreases the sustainability quality of its standard. Our results seem to adequately explain the evolution of the label market in the fair trade setor. This analysis an be also used to analyze other setors, suh as the fisheries setor. NGOs have been the front-runners in developing eolabeling shemes in this setor, and two main international fisheries ertifiation programs exist, the Marine Stewardship Counil (MSC) and the Friend of the Sea (FOS) (Washington and Ababouh, 011). In this setor, the first ator in the market, MSC, reated in 1997, has more stringent standards than the seond ator (FOS), whih was established in 006. Indeed, aording to Kalfagianni and Pattberg (013), ompared to FOS, MSC has more stringent standards, striter ompliane methods and is more inlusive. 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,

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