Inequality and the green product cycle | Marion Dumas

Abstract

There is mounting evidence that consumers’ desire to reduce their environmental impact can stimulate green innovation. However, we know little quantitatively about this process and how to leverage it for the transition to a clean economy. This paper asks what are the conditions that allow a “green consumer product cycle”, i.e. the process by which a green product goes from being expensive and niche to mainstream and affordable. I draw on the theoretical literature in macroeconomics and industrial organization that study how the heterogeneity of consumers, in terms of taste and ability to pay for quality, shape the dynamics of innovation. This literature predicts that the dynamics of the product cycle will be affected by the size, income and level of income inequality in a market. I use the Nielsen Homescan Consumer Panel dataset to test these hypotheses in the context of the penetration of organic products in the American food basket. I find that the socio-demographic characteristics of markets indeed shape the product cycle. A low-income household in a rich and large market has more access and buys more organic food than a household with the same income situated in a poorer or smaller market. However, greater income inequality in a market stimulates the product cycle for the top quintiles and dampens it for the bottom quintiles. Overall, demand for green is increasing, which stimulates green innovation; but heterogeneity between consumers creates incentives for firms to segment the market, which limits the spontaneous mainstreaming of green products in the absence of regulation.

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