In the state of current global trajectories, involving climate change, businesses are being pressured now, more than ever, to practice sustainability in production. Despite laws on production to protect the environment being enacted in countries such as the US & UK, global carbon emissions continue to soar to unprecedented heights. Now, consumers are faced with a pressing decision: enable unsustainable production methods and purchase affordable items, or pay premium prices for goods produced sustainably. With record high inflation, many people are simply unable to pay extraordinary prices for everyday items— exacerbating current environmental concerns.
To understand why there is a clear divide between affordable and premium goods, the definition of a business must be clear. To be successful, businesses must solve problems and make money. Unfortunately, in a competitive market (such as a perfectly competitive model, which nearly accurately represents the production of inferior goods), the barriers to entry are incredibly low. This allows many sellers into production, in which case it is the dominant strategy for each producer to operate at the lowest cost possible, then offering the lowest possible price to grow market share. In other words, businesses are incentivised in this market to implement cheap and unsustainable production methods; this strategy allows for lower production costs, making it possible for the seller to charge a lower price. In a market for inferior items, this lower cost is appealing to a consumer, who will nearly always pick the lowest price item (highest utility for lowest cost). Given this understanding of the affordable goods market, it is nearly impossible for a business to maintain both high quality and affordability, as this is an unprofitable model compared to competitors. Even if many business owners are deeply concerned with climate change and sustainable values, there will be one seller willing to compromise this concern for lower prices and more market share. Unless all sellers act together and implement sustainable practices, which may be contested by consumers, there will be no shift in producer strategy without involvement from regulatory production laws.
Furthermore, as previously stated, a business can either be sustainable or affordable– so what about the market for premium goods? What’s interesting is that the price mark-up on luxury goods is significantly higher than that of affordable goods. One of the most costly components for the premium goods market is marketing/promotional materials; a core way to gain a strong brand audience is to market the mission of sustainability. Also, producing goods in a high-quality and sustainable way is expensive. Following production protocols, finding ethical sources and paying livable wages adds up in comparison to manufacturers using cheap materials and underpaying their workers. The barriers to entry in the premium and sustainable market are high; it is expensive to produce and market these goods. Brand marketing is what differentiates these products: for example Glossier, Charlotte Tilbury, and Rhode– high-end make-up or skincare companies using promotional materials, packaging, content, and designs that appeal to different audiences. For these businesses, profitability comes from the higher-mark up on goods sold. While being sustainable is expensive, it does not fully justify the price increase on goods compared to the cost. While offering aesthetic features and ethical production is more costly than questionable practices, successful corporations for premium goods entice their audiences with big-budget marketing campaigns, therefore gaining global awareness and obtaining sales. In this case, the business may be less concerned with helping the environment, and is acting self-interested to maintain a consumer base from adopting sustainable values. Here, game theory suggests that operating in a sustainable way will appeal to consumers who are more willing to spend high prices on goods sourced ethically– failing to meet or maintain these standards would likely result in a loss of customers, and thus revenue which goes against the definition of a business.
Given these two sections of the goods market– premium and inferior, it is no wonder as to why sustainable practices are hard to come by. Entering the market for premium goods, especially those who are sustainable, is difficult. Additionally, there are a plethora of corporations operating in the premium goods market that secretly do not practice sustainable production. Unfortunately, in the current market, these brands are rewarded for this behaviour– as they are able to cut costs and maintain high prices against other premium competitors. With this, even more expensive brands have an incentive to not practice sustainability, making it even more difficult for brands who are operating with ethical practices to compete and hold market share as their cost is inordinately higher. As such, finding sustainable brands in the goods market at all is difficult and hard to come by. With this current set-up, all players (producers and consumers) are operating with their dominant strategy. Producers capitalise on what will make them money (whether that be unsustainable practices in the inferior goods market, or participation in the premium goods market), and consumers adopt either self-interested/feasible choices (saving money and purchasing inferior goods), or altruistic decisions (doing what is best for the overall good of the world by purchasing sustainably produced goods). This model only becomes tricky when a corporation acting in the premium goods market decides whether or not to be sustainable; overall this comes down to the amount of branding that surrounds a company’s values. If sustainability is a key portion of branding, it may be integral to the overall consumer base. If not, a business may shift focus of their audience by enticing customers with glamorous ad campaigns featuring celebrities and aggressive retail strategies. Either way, the business operates to best a) solve the problem of their target audience, and b) maintain profitability.
Despite this, not all hope is lost in the realm of sustainable production. There are strategies currently implemented, (i.e. government intervention, Pigouvian tax, etc) that all account for the environmental costs of the manufacturing industry. Countries such as the US and UK have adopted these strategies– essentially prohibiting substinence wages and unsustainable methods. If more countries were to adopt similar regulations and work in tandum against global climate change, there would be no method for unethical production and thus producers would be forced to follow more ethcial production guidelines. There is certainly more room for growth worldwide on a collaborative effort to more sustainable practices to fight against climate change.
Again though, since businesses turn a profit and consumers increase utility through purchases, sustainability is the only loser in the goods market. From operating at dominant strategy, businesses win by either maintaining competitive or appealing to their target audience. Consumers win by making choices that best suit their circumstances and desires. Sustainability loses as it fails to compete with the human desire for goods and a businesses desire for profitability. This being the present case, there are still many routes for future improvement in sustainability, often rooted in the decisions of those establishing the rules of the game – particularly the government and largescale intergovernmental organisations.
