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Market Evolution in the Green Transition

Recent research underscores the necessity of enhancing policies that promote the green economy to mitigate environmental risks, prevent monopolies, and address potential investment shortages.

Market Evolution in the Green Transition

The URV researcher, António Osório, has led the study. Image Credit: Universitat Rovira i Virgili

Fighting pollution, resource shortages, and climate change now require a green economy shift toward one that is more ecologically friendly and sustainable. Companies now have to switch from using conventional fossil fuels to using renewable energy. However, what impact does this change have on the market and intercompany competition?

In an effort to find answers, a research group at the URV performed a study that brought attention to the urgent need for environmental policy changes to ensure that the transition is complete and that there are no environmental dangers, corporate monopolies, or a lack of investment.

The study created a theoretical model of competition that took into account three potential scenarios throughout the green transition and was published in the Journal of Cleaner Production. In the first scenario, businesses continue to produce environmentally hazardous materials rather than investing in more environmentally friendly procedures. In the second scenario, a partial shift is suggested, with half of the enterprises investing in green initiatives and the other half continuing with traditional manufacturing methods.

In the final scenario, all businesses make investments in emission-free production and green transformation. Concerns over potential market concentration and diminished competition are raised by the first two possibilities.

The research highlights the pressing need to reduce the hazards to the environment and the economy posed by the trade-offs made in the first two scenarios. According to the theoretical model, the industry’s high expenses associated with transitioning to more sustainable production techniques account for the low number of enterprises that are devoted to making the transformation.

Additionally, the study concludes that price rises are unavoidable throughout the green transition phase. This is because using more environmentally friendly technology and materials comes with a price tag as well as modifications to production procedures that must be made. The research team highlights that this situation amplifies the rise in prices.

This phenomenon is attributed to vertical differentiation, where the pioneering “green leader” gains a competitive edge by being an early adopter of environmentally beneficial practices. Over time, this advantage can potentially evolve into a form of monopoly or significant market power for the “green leader.”

The analysis also points out that, while having higher costs, the scenario assuming that every business adopts green practices is the one that will have the biggest overall impact.

In this case, because of their environmental concerns consumers are willing to pay a higher price for environmentally friendly products. Despite the higher cost, consumers’ environmental satisfaction raises their overall benefit in this situation.

António Osório, Lead Researcher, Department of Economics, Universitat Rovira i Virgili

In summary, while price hikes are an unavoidable part of the green transition, company strategy selection and customer reaction can have a big impact on overall profit and, consequently, the success of the shift to more sustainable practices.

Journal Reference

António Osório (2023). Not everything is green in the green transition: Theoretical considerations on market structure, prices and competition. Science Direct.

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