On dynamic standards for energy efficiency in differentiated duopoly

We consider a two-periods-model of differentiated duopoly. Firms produce an en-ergy consuming household durable differentiated by its energy efficiency. Consumers differ by the weight they apply to their future energy costs when deciding which product to buy. In line with the Japanese Top Runner Program, the regulator introduces a minimum efficiency standard in period t=2 which is fixed according to the efficiency of the product supplied by the high efficiency firm in t=1. We show that in t=1 both firms supply lower efficiency products and the high efficiency firm gains in market share and profits. In t=2 these effects are re-versed. Calculated over both periods, total energy consumption does not change. Although there is no ecological effect, total welfare increases because price competition becomes tighter and the cost savings accruing to the consumers exceed the firms’ losses in profits.