Greenness as a differentiating strategy

Abstract

In a vertical differentiation model, we study a market where consumers, depending on their level of environmental consciousness, value the greenness of the product they consume and are distributed according to a Kumaraswamy distribution. Three scenarios are studied: only one firm takes some green measures and firms compete upon prices; only one firm takes some green measures, and this firm acts as the leader of the price competition; and finally, both firms choose their level of greenness and compete upon their location and price. The results suggest that as consumers become more environmentally conscious, the marginal consumer and the greener firm’s location move to the right. In contrast, the less green firm’s response is non-monotonic. In fact, when the two firms choose their location along with their prices, the latter firm chooses to produce a less green product in response to more environmentally conscious consumers. In the extreme case where all consumers are fully environmentally conscious, the latter firm produces a brown product and sells it at a price equal to its marginal cost. In this case, the greener firm’s price and location choices make the consumers indifferent between the two products. These results could explain why despite all the improvements in the consumers’ environmental consciousness, brown (in its general term) products are still widely produced and consumed, even by environmentally conscious consumers.