Sustainability and Strategic Differentiation in Unregulated Consumer Goods Markets

Motivated by the disconnect between regulatory discussions and industry reports on voluntary sustainability investments, we examine the market equilibrium for sustainable products in the absence of regulation, focusing on firms’ strategic differentiation in the U.S. consumer packaged goods (CPG) market. Using large-scale field data across multiple health and beauty care product categories from 2012 to 2019, we estimate a structural model of supply and demand for products differentiated with multiple types of sustainability features. We provide two key empirical contributions to the literature. First, the market shows a clear differentiation in sustainable products across brands. Dominant brands offer fewer sustainable products and, when they do, tend to provide lower-cost, less preferred sustainable options than their non-sustainable products. In contrast, smaller brands tend to offer high-cost, high-preference sustainable offerings. Second, this differentiation arises from consumers placing a lower priority on sustainability and favoring sustainability features from fringe brands, which weakens large brands’ incentives to invest in sustainability while creating differentiation opportunities for fringe brands. Implications for brands and policymakers are discussed.