Bravo Melgarejo, Sai and Haritchabalet, CaroleORCID: https://orcid.org/0000-0003-3788-8966 (2025) A model of vertical restraints and labeling: the case of green gases. Journal of Regulatory Economics. (In Press)

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Abstract

A labeling system for green gases, such as green hydrogen and bio-methane,
could enable retailers to leverage consumers’ willingness to pay for environmental quality while promoting the adoption of these cleaner alternatives. However, the significant cost gap between green and conventional gases raises concerns about the efficacy of such a label, particularly in markets with complex value chains such as road transportation. We develop a stylized model of a gas-based road transport market to evaluate whether the market’s organization could be as efficient
as a labeling policy when consumers lack direct information about production
methods. With the label, producers prefer to exploit the double marginalization to the detriment of social welfare. However, this allows the high-quality producer to cover its fixed costs. Producers can use vertical restraints to convey quality information to consumers without the label. The informational problem creates a trade-off between the intensity of competition (driven by perceived qualities) and cost efficiency. Implementing an optimal label policy depends on the cost gap between qualities and consumers’ expectations about the share of green gas in the market. Under the current cost gap, if consumers were to be informed about the current production landscape, it is possible that their beliefs would lean towards
a relatively pessimistic view. In such a case, the label would be socially optimal.