Green Production through Competitive Testing

Electronics waste is severely damaging to the environment and human health, especially in devel-oping countries. New regulations in the European Union, California and China prohibit the sale of electronics containing certain hazardous substances. However, because testing for these substances is expensive and destructive of the product, regulators cannot test all or even a significant fraction of the electronics sold. Electronics manufacturers have an incentive to test competitors ’ products, reveal violations to the regulator, and thus gain market share when the competitors ’ products are blocked from the market. We find that in many cases, regulators should not test products directly, but instead should rely on electronics manufacturers to do all the testing. Relying on competitive testing is most effective in markets dominated by a few firms and, conversely, is least effective in highly competitive markets composed of many small firms. Unfortunately, in the long run, reliance on competitive testing causes entry and expanded production by manufacturers with low quality, weak brands and consequently low compliance. The phenomenon of competitive testing has the potential to play out in any competitive market governed by product-based environmental, health or safety standards, and our insights apply more broadly to these settings. Subject Classifications: Cournot oligopoly; environmental regulation; industry self-regulatio