Product greening and pricing strategies of firms under green sensitive consumer demand and environmental regulations

Manufacturing firms globally face an increasing consumer demand for environmentally friendly products, along with regulatory changes. These entail significant costs for firms who are unsure about the benefits of greening. In this paper, we aim to answer questions on the economics of greening. We explore various problem settings where we study the impact of product greening costs and Government regulations on a single firm and duopoly, in a green sensitive consumer market. We study firm strategy to derive optimal values of product greening level, price and profits. In addition, we also analyze the impact of Government regulations on firms and society. We find that regulations serve the requisite objective of forcing firms to provide higher greening levels. However, under certain conditions they may have a limited effect. We find that under higher Government penalty or subsidy, a firm with a lower greening cost will offer higher product greening level than its competitor, in turn benefitting in a green consumer market. Under duopoly settings, we find that the relative greening level difference between the competing firms is increasing in the cost of greening difference. Further, the relative greening level difference between the firms is increasing in Government taxation or subsidy as well. We discuss various conditions under which firms would incur Government taxation or subsidy. The key contribution of our work lies in modeling Government regulations and decision making under demand expansion effects while analyzing the resulting decisions of product greening and pricing.