Commitment to Environmental and Climate Change Sustainability under Competition

Abstract

This study investigates how the commitment of firms under competition influences environmental sustainability investment, pricing decisions, and profits of firms. We consider a stylized model where two firms compete in the market and examine three scenarios: (1) both firms commit, (2) only a single firm commits, and (3) neither firm commits. Interestingly, we find that commitment to sustainability investment by all firms results in the lowest sustainability investment in the industry. However, when a commitment is only made by one firm, sustainability investment in the industry can be the highest. Compared with under the no commitment scenario, a committed firm obtains a higher profit regardless of whether the commitment is also made by the competitor, but the competitor may become more profitable than the committed firm when it does not make a commitment. Although commitment by all firms yields the largest profits, it is the least effective from the entire societal perspective, resulting in both the lowest social welfare and the lowest sustainability investment. Instead, commitment by a single firm or no commitment can be the most effective for the entire society. We also discuss the implications of the investment efficiency of sustainability and consumer taste preference.