Price competition and product differentiation based on the subjective and social effect of consumers’ environmental awareness

Abstract

Consumer environmental awareness (CEA) can affect green consumption decisions in different and confusing ways. In order to explain the reasons for these divergences, this study divides CEA into two main components: the subjective effect and the social effect. Then, we integrate the two effects into the classic Hotelling model to study the influence of CEA’s subjective effect and social effect on price competition and product differentiation strategy. It was found that the subjective and social effects of CEA have opposite impacts on price competition and product differentiation strategies. The subjective effect of CEA increases the price and profit level of enterprises, and enlarges the difference in the environmental friendliness of products. Meanwhile, the social effect of CEA reduces the enterprises’ price and profit level, and narrows the difference in the environmental quality of products. Therefore, we suggest that it is necessary for producers of green products to distinguish between these two effects. Numerical examples are provided to verify our findings. Finally, some possible suggestions regarding the competition of green products are put forward which take into consideration the subjective and social effects of CEA. The main contribution of this paper is to theoretically explain the opposite effects of the two different components of CEA on environmentally friendly product pricing and differentiation strategy; this presents a possible explanation as to why the behavior regarding CEA differs, and provides theoretical support for enterprises to price and differentiate green products.