Can Design for the Environment be Worthwhile? Green Design for Manufacturers Brands When Confronted with Competition from Store Brands

Abstract

To contribute to global sustainability, many manufacturers are starting to implement green product development and trying to provide environmentally friendly products. Although green products are environmentally beneficial to our society, the performance of green product development remains poor because of cannibalization from traditional alternatives at lower prices. This is particularly the case in the current unforgiving marketing reality in which many brand retailers, such as Wal-Mart, Tesco, and Carrefour, offer their own store brands as traditional alternatives. Although a large stream of research has studied the effects of competition on manufacturers’ green design, to the best of our knowledge, there is a dearth of research on the effects of competition from retailers’ store brands on manufacturers’ green design. To fill this gap, we present two models in which the manufacturer has an incentive to design for the environment, and the retailer has the flexibility to sell store brands (Model S), or it does not (Model N). Surprisingly, our analysis indicates that the presence of store brands may stimulate the manufacturer to release a new greener version of the national brand. Moreover, we find that although the presence of store brands is beneficial to the retailer and industry, it always hurts the manufacturer’s profitability. To incentivize the manufacturer to support Model S, we propose a two-part tariff contract.