Signalling and market segmentation
Other market characteristics may also inhibit the take-up of recycled plastics. For instance, "market signalling" may play a role.48 Similar processes occur with other goods and services where product quality or similar attributes may be unobservable. Thus high quality cars are sold from opulent showrooms, and inferences will be made about cars sold from more basic premises. This could be used as a means of price discrimination, where a manufacturer will separate customers into those with a high willingness to pay for a good from those with a low willingness to pay.
In this case, the market cannot be relied on to provide the right range of products. This is an important market failure for which government policy may be necessary since the presence of competition in both price and quality can lead to some unexpected and perverse results. In the area of recycling, this may result in sub-optimal levels of material recovery.
In setting prices, the producer will take account of the preferences of the different consumers, and will want to "price discriminate"49 in order to maximise profits. For instance, if environmentally-aware consumers are prepared to pay a premium, it will be in the producers" interests to charge a higher price for reprocessed than virgin-based plastics, even if they are qualitatively identical or even inferior. Moreover, as the proportion of "environmentally-aware" consumers increases, the quality of the recycled plastics may well fall since this will allow the producers to continue to segment the market in the face of rising demand for reprocessed plastics.
The precise impact of these different effects will depend on the parameters of demand, and even the direction of the effect on recycling levels cannot be known with certainty. The conclusion to be drawn here is that just as demand and price are endogenous variables determined within the market, so is the price and quality difference between virgin and recycled products. This quality difference is limited by technical considerations.
Post a comment