A game-theoretic analysis of the impact of government subsidy on optimal product greening and pricing decisions in a duopolistic market

Abstract

In compliance with environmental and emerging international imperatives, promoting sustainable consumption and production is far due and pivotal for greening supply chains. Rampant demand for environmentally-friendly products and regulatory changes have pressured manufacturing companies to reassess their products and processes. Yet, the cost of greening and its allocation remain challenging tasks. This study investigates government subsidy strategies to encourage firms to transition to green production strategies and improve environmental quality when heterogeneous consumers are sensitive to sustainability. We consider a leader-follower Stackelberg game between two profit-maximizing firms with different green technologies (the followers) and a government (the leader). Those two competing firms sell two differentiated products to a price- and pollution-sensitive market. We first discuss the target level of greenness that can improve the environmental quality and then design the appropriate subsidy rate. We show that the government subsidy can decrease the selling price, increase the market share and the profit from greener products, and positively affect EQ. Contrary to some findings in the literature, we find that a higher subsidy rate may not always simultaneously benefit the environment, social welfare, and social surplus. Finally, we validate our structural results with various numerical examples and sensitivity analyses.