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The effect of life-cycle cost information on consumer investment decisions for eco-innovation
Type
fundamental research project
Start Date
01 January 2008
End Date
31 December 2008
Status
completed
Keywords
Eco-innovation
life-cycle cost information
choice experiments
behavioral economics
information asymmetries
consumer investment decisions
sustainability marketing.
Description
Global sustainability challenges like climate change and the depletion of natural resources indicate the need for innovation. While significant technological development has taken place in the energy sector and oil prices have reached all-time highs, the market diffusion of eco-innovation has remained at surprisingly low levels so far. An important barrier to the diffusion of eco-innovation is the existence of external costs and information asymmetries. The literature on eco-marketing has suggested internalization of public benefits as a way to accelerate market diffusion of green consumer products, and has identified customer segments that are willing to pay more for these products. Similarly, environmental economists have identified ways to overcome information asymmetries through eco-labeling. Recent literature on energy-efficient products and carbon reduction potentials, however, indicates that the traditional "green & expensive" versus "brown & cheap" dichotomy may be an oversimplification. We suggest breaking out the relative costs of environmental products into two dimensions, namely initial costs and operating costs. By doing so, it becomes evident that there is a wide range of environmental products that are not characterized simply by higher total cost, but rather by a different investment profile, namely higher initial cost versus lower operating cost. As a consequence, the life-cycle cost for these products may be even lower than for conventional alternatives. This observation has important implications for the understanding of consumer decisions for eco-innovation, and hence for sustainability marketing. Rather than finding ways to make customers pay more for environmental products, the marketing challenge needs to be re-conceptualized as one of lowering customers' perceived initial cost and increasing their awareness of life-cycle cost.
Taking customer preferences for one product category with particularly high importance for sustainability, namely residential heating technologies, as a starting point, the objective of this project is to increase our understanding of the perception of initial, operating, and life-cycle costs and their implications for consumer investment decisions. By adopting a behavioral economics perspective, we intend to identify cognitive biases in consumer decisions concerning eco-innovation and address ways to overcome them. In particular, we are interested in analyzing the signaling effect of life-cycle cost information as a means to overcome information asymmetry. Using discrete choice experiments in a survey of 700 homeowners in Switzerland will allow us to determine the relative importance of different attributes in the purchasing decision for solar heating. Splitting the choice experiments into two parts will allow us to get a comprehensive picture of the overall influence of various attributes, as well as a more in-depth understanding of the relative importance of initial costs versus operating costs for different consumer segments. The experimental setting will also allow for testing the effect of different ways of framing life-cycle cost information.
The results of the proposed project will provide important contributions to the literature on sustainability marketing, diffusion of eco-innovation, and policy measures. It will also lead to recommendations for practitioners and policy-makers in order to accelerate the diffusion of sustainable energy technologies.
Taking customer preferences for one product category with particularly high importance for sustainability, namely residential heating technologies, as a starting point, the objective of this project is to increase our understanding of the perception of initial, operating, and life-cycle costs and their implications for consumer investment decisions. By adopting a behavioral economics perspective, we intend to identify cognitive biases in consumer decisions concerning eco-innovation and address ways to overcome them. In particular, we are interested in analyzing the signaling effect of life-cycle cost information as a means to overcome information asymmetry. Using discrete choice experiments in a survey of 700 homeowners in Switzerland will allow us to determine the relative importance of different attributes in the purchasing decision for solar heating. Splitting the choice experiments into two parts will allow us to get a comprehensive picture of the overall influence of various attributes, as well as a more in-depth understanding of the relative importance of initial costs versus operating costs for different consumer segments. The experimental setting will also allow for testing the effect of different ways of framing life-cycle cost information.
The results of the proposed project will provide important contributions to the literature on sustainability marketing, diffusion of eco-innovation, and policy measures. It will also lead to recommendations for practitioners and policy-makers in order to accelerate the diffusion of sustainable energy technologies.
Leader contributor(s)
Member contributor(s)
Kaenzig, Josef
Funder(s)
Topic(s)
Eco-innovation
life-cycle cost information
choice experiments
behavioral economics
information asymmetries
consumer investment decisions
sustainability marketing.
Method(s)
Discrete choice experiments
Range
Institute/School
Range (De)
Institut/School
Principal
Universität St. Gallen
Division(s)
Eprints ID
41648
4 results
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PublicationThe effect of life-cycle cost information on consumer investment decisions for eco-innovation( 2008-03-11)
;Kaenzig, Josef ;Geer Ken, Theo ;Tukker, Arnold ;Vezzoli, CarloCeschin, FabrizioType: conference paper -
PublicationType: journal articleJournal: Zeitschrift für EnergiewirtschaftVolume: 33Issue: 2
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PublicationIntertemporal Choices regarding Sustainable Energy Consumption - Conceptual and Experimental Insights from the Residential Sector(Difo-Druck, 2010)Kaenzig, JosefHigher initial costs are a major barrier for environmentally sound innovations (eco-innovations) such as solar thermal collectors, photovoltaics, and energy-efficient appliances. Understanding customer choices and the underlying decision-making processes regarding eco-innovations are key factors for their successful promotion. Many eco-innovations reduce resource consumption during use, resulting in a reduction of operating costs and dependency on resource imports. Today, marketing for these products heavily emphasizes initial costs whilst the reduced operating costs are often not fully considered by consumers. Consumer investment decisions for products and services with higher initial costs and lower operating costs are potentially subject to heuristics and cognitive biases, such as present biased preferences and framing effects. This doctoral thesis provides a conceptual framework for categorizing different cost profiles of eco-innovations and their corresponding customer segments. The framework considers reference points and reference prices, which are concepts used in prospect theory and theories on mental accounting. Hypotheses on the decision-making process for eco-innovations are derived from a rational choice and behavioral perspective. Literature review, conceptual contributions, as well as the original empirical work on heating equipment and electricity products are used to investigate customer preferences and decision-making processes for sustainable energy consumption in the residential sector. Choice experiments show how offering comparative life cycle cost (LCC) information increases the likelihood that heating equipment with lower operating costs will be chosen. This doctoral thesis concludes that marketing efforts should focus on lowering perceived initial costs and on the specific preferences of various customer segments, rather than finding ways to make customers invest more for environmentally sound innovations. This research establishes promising strategies to render eco-innovations attractive and affordable to customers beyond the niche. Better dissemination and consideration of LCC information provides an important base for long-term thinking on the individual, corporate, and policy level.Type: doctoral thesis
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PublicationThe Effect of Life Cycle Cost Information on Consumer Investment Decisions Regarding Eco-InnovationLife cycle cost (LCC) computations are a well-established instrument for the evaluation of intertemporal choices in organizations, but they have not been widely adopted by private consumers yet. Consumer investment decisions for products and services with higher initial costs and lower operating costs are potentially subject to numerous cognitive biases, such as present-biased preferences or framing effects. This article suggests a classification for categorizing different cost profiles for eco-innovation and a conceptual model for the influence of LCC information on consumer decisions regarding eco-innovation. It derives hypotheses on the decision-making process for eco-innovation from a theoretical perspective. To verify the hypotheses, the publication reviews empirical studies evaluating the effects of LCC information on consumer investment decisions. It can be concluded that rather than finding ways to make customers pay more for environmentally sound products, the marketing challenge for eco-innovation should be reconceptualized as one of lowering customers' perceived initial cost and increasing awareness of LCC. Most existing studies report a positive effect of LCC information on the purchase likelihood of eco-innovations. Disclosing LCC information provides an important base for long-term thinking on the individual, corporate, and policy levels.Type: journal articleJournal: Journal of Industrial EcologyVolume: 14Issue: 1
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