Strategic Pricing and Investment in Environmental Quality by an Incumbent Facing a Greenwasher Entrant

We examine how greenwashing affects the strategies and outcomes of companies and consumers. We develop a two-stage game, where a monopolist sets price and invests in environmental quality in the first stage, and competes with a new entrant in the second stage. The incumbent company is genuinely environmentally friendly, while the new entrant may use deceptive green marketing. We assume that only inexperienced consumers can be influenced by greenwashing, and consider two important dynamic factors, i.e., a change in competitive structure and a learning effect in the market. We investigate the conditions under which greenwashing is profitable for the new entrant, the ways in which the incumbent company responds to it, and the impact of greenwashing on the environment and consumers. We find that greenwashing can be mutually beneficial for both firms thanks to higher market potential and the incumbent's first-period actions. Customers always suffer from greenwashing, and in rare cases, greenwashing can be beneficial to enhance environmental quality.