Abstract
This study investigates how the commitment of firms under competition influences environmental sustainability investment, pricing decisions, and profits of firms. We consider a stylized model where two firms compete in the market and examine three scenarios: (1) both firms commit, (2) only a single firm commits, and (3) neither firm commits. Interestingly, we find that commitment to sustainability investment by all firms results in the lowest sustainability investment in the industry. However, when a commitment is only made by one firm, sustainability investment in the industry can be the highest. Compared with under the no commitment scenario, a committed firm obtains a higher profit regardless of whether the commitment is also made by the competitor, but the competitor may become more profitable than the committed firm when it does not make a commitment. Although commitment by all firms yields the largest profits, it is the least effective from the entire societal perspective, resulting in both the lowest social welfare and the lowest sustainability investment. Instead, commitment by a single firm or no commitment can be the most effective for the entire society. We also discuss the implications of the investment efficiency of sustainability and consumer taste preference.
Highlights
Climate change has emerged as an important issue in recent years and firms increasingly consider climate change as a strategic matter that they have to address [1,2]
Walmart committed to reducing greenhouse gas emissions by 50 million metric tons in China by 2030 [6], and P&G committed to a sustainability strategy toward 2030 including a plan to cut its emissions in half [7]
Different from prior studies that mostly focus on the price or quantity commitment, our study adds to the literature on firms’ strategic commitment by considering the commitment sustainability investment, which is increasingly found in practice, for firms under competition
Summary
Commitment strategy has been recognized as one of the central factors playing a key role in competitive markets in economics and management literature [10,11,12] Despite this emerging practice and the importance of commitment strategy under competition, little is known on how the firm’s commitment strategy would influence the sustainability investment of the committed firm itself as well as that of the competing firm and influence prices and performance of firms under competition. When commitment to sustainability investment is made only by a single firm, it may lead to the highest sustainability investment of the industry due to the committed firm’s heavy investment, despite the competing firm’s lowered investment This provides an important insight that the current trend in industries toward committing their sustainability strategies has complicated effects: the commitment strategy can be desirable to the society in terms of the sustainability dimension only when it is used by a fraction of firms.
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