A Theory of Multitier Ecolabel Competition

Ecolabels are widely used to inform markets about credence attributes of products. We present the first analysis of ecolabel competition that allows labels to have multiple tiers (e.g., silver/gold/platinum). For either an industry association or an NGO sponsor in autarky, binary labels are preferred when a large enough share of producers have a low cost of quality and when cost heterogeneity across firms is limited; multitier labels are preferred when a large enough share of producers have a high cost of quality and when cost heterogeneity is substantial. The NGO implements welfare-maximizing standards under certain conditions; the industry never does. When sponsors with differing objectives compete, the unique equilibrium involves multitier labels, with less environmental protection than the NGO in autarky would provide. The multitier equilibrium is robust to endogenous entry by producers.