How Corporate–NGO Partnerships Affect Eco-Label Adoption and Diffusion

In a proposed multistage game, a firm and an environmental nongovernmental organization (NGO) initially partner to develop an eco-label, to attain both the environmental benefits and profits. The partnership enables a compromise, and the partner firm, as well as other competitors in the market, subsequently decide whether to adopt the eco-label. Finally, the firms compete on price or quantity in a homogeneous or vertically differentiated market. By analyzing firms’ incentives to adopt the eco-label, this study predicts outcomes related to the eco-labeling strategies of the NGO and the corporate partner, the diffusion of the eco-label, environmental quality, and welfare, depending on both the nature of the competition (Bertrand or Cournot) and the degree of consumer heterogeneity. The results of the game show that it is always in the interest of the environmental NGO and the firm to form a partnership. The corporate partner’s incentive to adopt the eco-label is stronger in Bertrand than in Cournot competition, but diffusion occurs only with Cournot competition. Paradoxically, the NGO may prefer a less stringent eco-label, to promote its diffusion and the consumption of eco-labeled products. Whereas in Cournot competition, eco-labeling improves all components of welfare, in Bertrand competition, it degrades consumer surplus, even if it improves overall profits and environmental quality.