Are Green Consumers Good for Profit? Bad for the Environment?
When consumers express a preference for “green” products, what does that actually mean for firm profits and environmental harms? New research from YCCI explores this question – and reveals some counterintuitive insights.
“Any plan which increases the consumption of goods is justifiable if we believe prosperity is a desirable thing,” wrote the pioneering ad man Earnest Elmo Calkins in 1932. The United States was in the midst of the Great Depression. Modern environmentalism was nonexistent.
We know now the ecological costs associated with unfettered consumption. Today, “the negative impact of runaway human production and consumption on the environment has become more visible and tangible,” writes K. Sudhir, professor of marketing at the Yale School of Management, in a new working paper with Ramesh Shankar from the University of Connecticut and Yuan Jin from Texas Tech University. “Concerns about the long-term sustainability of this production and consumption path have become more mainstream.”
But what has this burgeoning awareness ultimately meant for consumer decisions and environmental harm? What has it meant for the profitability of firms that depend on the obsolescence of old products and the release of new ones?
But what has this burgeoning awareness ultimately meant for consumer decisions and environmental harm? What has it meant for the profitability of firms that depend on the obsolescence of old products and the release of new ones?
To start mapping answers to these questions, Sudhir and his colleagues constructed a model that has two basic components. On one side are consumers who are concerned about the environment. On the other side is a firm that releases a product – a smartphone, for instance – that is later superseded by a next-generation innovation upgrade of the same product. The paper considers three types of innovations: more functional, more fashionable, or more efficient during operation. Consumers decide whether or not they want to discard the product they have and get a new one. A final essential component of the model varies the extent of environmental harm generated by the product’s ongoing use as compared to the product’s disposal. (Cars and air conditioners are far more harmful during use, while disposal of clothes or computers is more problematic than their use.) Based on these variables, the researchers study how consumer choice interacts with the firm’s offerings and its profit, and what these interactions imply more broadly for the environment.
“Our results clarify how to design win-win policies for both firms and the environment,” they write. “Specifically, we can assess when profit-maximizing firms will themselves take actions consistent with environmental goals, and when other interventions may be needed for environment-friendly outcomes.”
They find only one setting where there is alignment between firm profit and environmental outcomes: in categories in which environmental harm comes predominantly during use, and the new product improves efficiency. In these cases, as consumer environmental sensitivity increases, firm profits will also increase with use efficiency innovations. If instead, however, the bulk of environmental damage comes from product disposal (rather than use), then growth in environmental concern among consumers decreases firm profits; in this case, profit and environmental outcomes are misaligned.
Most surprising, when a second-generation product innovates around fashion or function rather than efficiency, increasing environmental sensitivity among consumers can actually lead to greater environmental harm. The intuition is that “green” consumers avoid purchasing second-generation products for reasons of fashion or function and, as a result, firms lower prices to attract a broader consumer base. When operation of the product is particularly environmentally damaging, this expanded consumer base leads to more use, and thus more harm.
The research also considers situations in which governments mandate efficiency innovations by certain deadlines. Surprisingly, the researchers find that when consumers are very concerned about the environment, and ongoing usage harm is much higher than harm from dumping the product (e.g., cars), firms will not educate consumers about the future arrival of the better product, and environmental advocates need to educate consumers about the potential arrival of new, more efficient innovations to minimize environmental harm. This is because firms are more concerned about the environmentally conscious consumers delaying their purchase by waiting for the innovation. In contrast, if the consumers are not very sensitive about the environment, the firm will be less worried about delayed purchases, and environmental advocates do not need to intervene to minimize environmental harm. Ultimately, the work demonstrates that increasing consumer concerns about the environment interact in complex ways with product innovation and firm profits – and in ways that don’t always benefit environmental outcomes.
“There are situations when higher environmental awareness among consumers does not always lead to better environmental protection without complementary regulatory action or support from environmental advocates to protect the environment,” the researchers write. This lack of alignment happens when we have new, highly fuel-efficient products in categories which consume lots of energy during use (e.g., cars, air conditioners, refrigerators), and consumers are very sensitive to environmental harm. In the absence of education coming from firms themselves, environmental advocacy would be more effective in places where consumers are more environmentally sensitive than in places where consumers purchase decisions are less impacted by environmental considerations. “[This] goes against conventional wisdom that might suggest that environmental awareness and the effort of sustainability advocates or regulators are substitutes.”
