A dynamic model considering consumer green awareness and environmental subsidy

Abstract

We consider a firm’s green level decisions in a dynamic environment. The firm must meet a minimal regulatory green level (MRGL). The firm also has the option of committing to a green level above the MRGL and receives a one-time subsidy from the government. A firm which commits to an above-regulatory green level (ARGL) must achieve that level in every future period. Furthermore, government provides an additional end-of-period subsidy for the firm if its green level in that period exceeds the ARGL. The firm faces demand from consumers with green-awareness. We derive the firm’s optimal green level. We show that the optimal green level in each period converges to a constant steady-state green level characterized by simple conditions. For specific forms of green cost, government subsidy, consumer memory and green preferences, we derive closed-form expressions for the firm’s steady-state optimal green level and examine its sensitivity to the problem parameters. We find that an increase in consumers’ green sensitivity and memory level may not make it beneficial for the firm to raise its committed ARGL depending on the environmental subsidy. Moreover, if the firm ignores long-run implications of its product green design strategy, it may systematically adopt a suboptimal low green level and thus make a lower profit.