Signaling can increase consumers' willingness to pay for green products. Theoretical model and experimental evidence

Abstract

Abstract Many green products are costlier than their nongreen counterparts, for a variety of reasons. This “green premium” is a key challenge marketers face when targeting consumers with these green products. A potential solution to this issue is provided by signaling theory. According to the theory, green products can have a signaling benefit. This benefit acts as an incentive for consumers to pay a premium for environmentally friendly products that can even out their price disadvantage (the green signaling hypothesis). Previous studies have tested the green signaling hypothesis with hypothetical buying decisions. The research at hand tests the green signaling hypothesis with incentive‐compatible purchase decisions in a laboratory setting with student subjects. As predicted, subjects exhibit a higher willingness to pay for green products when the product choice (a nongreen product vs. a costlier green counterpart) is public rather than private. The results also suggest that green signalers are treated more favorably in social interactions. The main result is that a signaling benefit can even out moderate green premiums. One implication of this is the idea that marketers should design green products that are costlier than their nongreen counterparts in a way that renders them clearly recognizable as green. At the same time, marketers should avoid marketing everyday green products with a high green premium.