Study on the Supervising Mechanism of Ecological Products
Market under Asymmetric Information
H Y Li
*
, L K Hu and Z K Li
College of Management, Chongqing University of Technology, Chongqing 400054
Corresponding author and e-mail: H Y Li, lihaiyan@cqut.edu.cn
Abstract Considering a really bad situation of the ecological market, such as untruth prices,
and
so on, we focused on the government supervision. Firstly, we analyzed quantitatively the
difficulties and obstacles of government supervising on the ecological product market under
asymmetric information. Further, considering the government as decision-maker, we
constructed the adverse selection model of government supervision to maximize the total
social welfare and proposed the contract menu about transfer payment, production quantity,
and price limit. In the last, we deeply analyzed the efficiency of the supervising mechanism
and its effect on the ecological product market. The research results show that in the early
stage of the market, the supervising mechanism can avoid the high ecological level
manufacturers from obtaining the information rents, thus effectively restrain the overpriced
phenomenon in the ecological product market. The results of this paper provide better
theoretical support and decision-making reference for the government to supervise the market
of ecological products so as to promote the benign and sustainable development of ecological
products market.
1. Introduction
With the worsening of ecological environment and frequent outbreaks of environment, health and
food safety accidents, in order to meet the needs of the people's health and life, ecological products
[1] get more and more attention of consumers, ecological product market has been gradually
establishing and developing, from ordinary daily necessities such as ecological eggs, rice, ecological
clothing to some life's durable goods such as ecological air-conditioner, automobile, etc. Ecological
product market, as a new kind of market with strong public welfare and premium price, lack of
standard market operating systems and rules and shows some shortcomings and inefficiencies, such
ordinary products instead of ecological
products [2], thus some complaints of consumers have arisen. Should the government regulate the
eco-products market? How can they regulate? It has become a dilemma choice for the government.
On the one hand, the bad market behavior will not only harm the interests of consumers but also lead
to unreasonable allocation of resources, which will damage the whole social welfare. On the other
hand, improper government regulation can cause problems such as loss of efficiency of
manufacturers and disturb the market process. In order to promote the benign and sustainable
development of ecological products market, the answers to the following questions are very
Li, H., Hu, L. and Li, Z.
Study on the Supervising Mechanism of Ecological Products Market under Asymmetric Information.
In Proceedings of the International Workshop on Environmental Management, Science and Engineering (IWEMSE 2018), pages 703-709
ISBN: 978-989-758-344-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
703
important, such as how to motivate and lead the market efficiently? How to regulate the premium
price at a reasonable range while giving full play to the ecological public welfare?
At present in the research areas about government's guidance and regulation of ecological
products, the topics mainly involved the ecological (low carbon, green) production mode, ecological
consumption, and ecological product quality, and the main research issues focused on the
importance and significance of the ecological regulation[3-4], supervising policy [5-6] and impact
on business decisions [7-8], etc. The vast majority of the above research is qualitative and empirical
research. The minority has been done by using the mathematical model, but mainly considered the
enterprise as the decision-maker, government parameters as exogenous variables or constraints into
the decision-making model, and focused on the influence of government fines, subsidies on strategy
of enterprises. Aiming at the characteristics of public welfare and premium price of the ecological
product, considering the asymmetric market information, we build the adverse selection model of
government regulation to maximize the total social welfare and propose the contract menu about
transfer payment, production quantity, and price limitation. The paper quantitatively analyzes the
government's supervising dilemma under asymmetric information and the efficiency and influence of
government supervising on ecological products market. The research results can provide theoretical
support and decision-making reference to help the government to make a reasonable guide policy in
the ecological product market.
2. Supervising models under symmetric information
2.1. Basic model description
Ecological products are beneficial to improving the environment and human life, keeping health and
value. So, they have a premium price. To model this problem, we assume that the governments
transfer payment to the unit's ecological product is S. To avoid the high ecological level
manufacturers who obtained the government subsidy further increase the selling price and limit the
sales volume to obtain the excess profits, we supposed the quantity supplied by the eco-manufacturer
should not be lower than , and the payment limit of the consumer to the eco-manufacturer is T.
Assuming the social cost that the government take 1 unit of money is
, of which . To
simplify the solution of the model, assume the fixed cost of the manufacturer is zero. The
manufacturer's production cost is
, and is the marginal cost of production
for ecological products. is the additional production cost for ecological value, such as the
cost of energy conservation and emissions reduction, acquisition of green materials et al, in other
words, it is the ecological cost of the product. Without loss of generality, considering that e is
positively related to the ecological level of products. The larger is , the higher the ecological level
of products is. When , it means the product is a traditional product.. Assume that the utility
function of a consumer is U (Q). The government makes decisions according to T, S, Q. To let the
manufacturers and consumers participate in the trade, and maximize the social welfare, the
government's problems can be modeled as:
( , , )
max ( ) (1 )
T S Q
U Q TQ TQ SQ c e Q g SQ
U(Q)-
2.2. The efficiency and dilemma of government regulation
To solve the above basic model through the first-order approach, we can get proposition 1:
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Proposition 1:
As can be seen from Proposition 1, the expected return of the eco-manufacturer (the willingness
of consumers to pay) is equal to the limit payment (T) plus the transfer payment (S). That is
. If the government transfer payments S=0, then
. Proposition1 shows that
government bears the burden of consumption ecological product. In reality, government subsidy can
be shown as a direct subsidy to eco-manufacturers or indirectly to consumers.
Proposition 1 demonstrates that under complete information situation, the supervising mechanism
(T,S,Q) can realize the marginal revenue of the ecological manufacturer equal to the marginal cost,
that is
. Proposition 1 shows that the supervising mechanism is efficient and it can
make the market of ecological products comply with the Ramsey pricing law (the marginal utility of
an agent is equal to its marginal cost). However, in order to achieve the above regulation, the
necessary condition is that the government must master the relevant information. It means that the
government needs to know the exact marginal production cost of the eco-manufacturer
and
the consumer demand for the eco-products in the market.
In reality, the government can understand the production cost information of non-ecological part
(c) through the ordinary manufacturers; however, it is difficult to grasp the ecological cost
information(e), which is the private information of eco-manufacturers. The higher the ecological cost
(e) is, the higher the consumer willing to pay. The bigger (T+S) the vendor gets.
Therefore, out of self-interest, the manufacturer prefers hiding the ecological cost information,
and even disguises the traditional product as the high ecological level products. So, the government
needs to solve the problem of adverse selection under asymmetric information.
3. The regulation model under asymmetric information
According to The Principal-Agent Theory, the ecological product information is asymmetry, and
producers have the tendency to show high-cost type (high level of ecological) signal. In order to
protect consumers' rights and interests, the government should provide different to different
eco-level manufactures based on the manufacturer's prior probability. So, we design a set of
supervising contracts menu to reveal the vendor's real types.
Suppose there are two possible vendor types, one of which is the high ecological level, its cost is
,
. To enable manufacturers to choose
their preferred contracts, the government offers a menu of contracts that
is
.
The contract must satisfy two conditions: participation conditions and incentive compatibility
conditions [1,8]. Participation conditions require that both types of manufacturers and consumers
accept the contract. The incentive compatibility condition requires that the best interest can be
obtained only when the manufacturer selects a supervising contract that is designed for its own type.
Under both previously described condition, in order to maximize the social welfare, the government
makes decisions based on the prior probability
and (
) of the
manufacturer's ecological level. Thus, the following government regulation model can be established:
Study on the Supervising Mechanism of Ecological Products Market under Asymmetric Information
705
Formula (1) is the objective function of government regulation, namely maximization of social
welfare; Formula (2) and (3) are the participation constraints of manufacturers in the case of high
ecological level and low ecological level; Formula (4) and (5) are the participation constraints of
consumers; Formula (6) and (7) are incentive compatible constraints, that is, to ensure that
manufacturers are only interested in the regulation contracts designed for themselves, and are
unwilling to pass themselves off as other types. Easy to know formula (3) is implicit in formula (2)
and formula (7), which are non-tight constraints.
Applying the Lagrange multiplier of formula (2), (4), (5), (6) and (7) is respectively as
Lagrangian first order conditions for solving
, then solve the first
order condition of Lagrange, we have the following equations:
4. Analysis on market characteristics and supervising efficiency under asymmetric information
4.1. Market characteristics
Proposition 2: ξ=0, the high ecological level manufacturer is unwilling to disguise as a low
ecological level manufacturer.
Proof: because
, according to the K-T condition:
to the K-T condition:
By the equations (14) and (15), we can get:
, it means
.
But, because
，then
；
If
, then
, it means
, so
,
it contrary with
That is, as for incentive compatible conditions (6), the left side is greater than the right forever. It
means that the utility of the high eco-manufacturer is greater than that of the low eco-manufacturer.
Therefore, the high eco-manufacturers in the market will not disguise themselves as low ecologica l
manufacturers.
Because
, so lagrangian multipliers are , according to the
K-T condition, we can get the following equations:
Proposition 3:
, it means that quantity of high ecological products on the market is smaller
than that of low ecological products.
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Proof: by equation (19) , it can be obtained that:
Proposition 3 shows that the quantity of high ecological product will be strictly less than that of
low ecological products. Generally, high-level ecological vendors often decrease the market sales to
win super profits.
Proposition 4:
From Proposition 4, it can be seen that, under adverse selection, consumers' willingness to pay for
high ecological products is greater than their marginal cost, and high eco-manufacturers obtain
information rent (
) due to the asymmetry of ecological cost
information; The willingness of consumers to pay for low ecological products is equal to their
marginal cost. Proposition 4 shows high ecological products can get high premium price in the
market, mainly due to the asymmetry information of
prices through expectations of a gap (
) in the ecological level of high ecological products and
low ecological products.
Make
Lemma 1 .
From Lemma 1, we know that the larger the value of ecological products is, the higher the
information rent eco-manufacturers can get. This can explain the fact that the higher the ecological
level of the product is, the more obvious is the premium phenomenon. Due to the asymmetry of
ecological cost information, consumers' payment of ecological products mainly depends on their
manufacturers increases in the market, the information rent of eco-manufacturers will decrease.
When eco-manufacturers in the market all have the high ecological level, it means
information rent is zero. On the contrary, when there are fewer high eco-manufacturers in the market,
more information rent is available.
4.2. The efficiency of government regulation under asymmetric information
Proposition 5:
Solve combined equations (16) and (19), we can get proposition 5.
According to Proposition 5, under asymmetric information, government regulation can realize the
marginal revenue of high ecological manufacturer equals to its marginal cost. Proposition 5 shows
that, under the asymmetric information, the government can avoid low ecological companies
disguising as high ecological manufacturers by distorting low ecological vendor contracts and
relaxing price limit of low ecological products.
From Proposition 4 and Proposition 5, we can get lemma 2.
Lemma 2
；
Lemma 2 shows that the regulation mechanism can avoid the high eco-manufacturer obtaining
information rent (
). This can effectively restrain the high premium
price of high ecological products in the market.
The government can also increase transfer payments (
) to reduce consumers' pay limit (
) for
purchasing power to high ecological
products; By Lemma 2 we know that the marginal utility of consumers' consumption of low
ecological products is lower than their price (
) plus transfer payments (
), and it means that the
value of consuming high ecological products is higher than that of consuming low ecological
products.
Study on the Supervising Mechanism of Ecological Products Market under Asymmetric Information
707
Proposition 5 and lemma 2 show that the regulation mechanism has a positive effect. It can avoid
high ecological vendors obtaining information rent, and achieve the marginal profit of high
ecological manufacturer equals to its marginal cost, so as to optimize the market allocation of
is, it means when the majority of manufacturers are low eco-level
manufacturers in the market, the fewer the amount of high eco-manufacturers is, the more effective
government regulation is.
5. Conclusions
For the ultra-premium problems of ecological products, and considering the characteristics of public
welfare of ecological products, we analyze quantitatively the difficulties and obstacles of government
supervising on the ecological product market under asymmetric information. Further, standing in the
government's perspective, we construct the adverse selection model of government regulation to
maximize the total social welfare and propose the contract menu about transfer payment, production
quantity, and price limit.
The research results show that the asymmetric information of ecological product leads to low
allocation efficiency of resource in the ecological product market. For example, high ecological
manufacturers access to information rent and win the excess profit, and low ecological manufacturers
conceal their true ecological level, even pretending to be a high ecological manufacturer. However,
through a set of separate regulation contract menu (
), it is possible to
effectively restrain the ultra-premium of high ecological products, improve the allocation efficiency
of resource in theecological product market.
The results show that in the early stage of the market, high eco-
smaller) and government regulation is of great significance to the benign and sustainable
development of the market. It can avoid the impact of the information asymmetry on the market.
However, the implementation of government regulation depends on the balance between the
regulation costs and outcome. It has tended to over-rely on the empirical data of the ecological
product market, such as ecological cost info -
manufacturers in the market, and so on.
Acknowledgments
This work was financially supported by the Scientific and Technological Research Program of
Chongqing Municipal Education Commission [Project No. KJ1400906].
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