The effect of life-cycle cost information on consumer investment decisions for eco-innovation

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.